Especially as of late – it was going “bad” with the economy and interest rates were rising. How come we see so many stocks with an “All time high”? I’m not looking for a psychological explanation, but literally: where do the coins come from to purchase?
In: Economics
Your question relies on why we expect stock markets to rise in the first place. Stock prices represent three things: (i) the future earnings for the firm, (ii) divided by the number of total shares, (iii) discounted by the riskiness of those earnings/share.
For example, a firm expects to earn $100 next year and the firm is also divided into 10 shares. People would be willing to pay up to $10/share for the firm, but because there’s always business risk, perhaps investors apply a 10% discount and are only willing to pay $9/share today.
That discount fades over time since the firm would have actually earned that $100. This steadily pushes the share value up from $9/share toward $10/share. This means investors can expect to earn that very discount rate, which compensates them for enduring the volatility of stock returns.
Multiply this effect over all future years of earnings, across all the firms in the stock market, and you have the general upward trend in stock markets.
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