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
There are many reasons the “market” can rise:
1. The market which is measured is usually the top 100 or top 500 companies. People can take their money out of small companies and put them into the big companies, and the market appears to go up, but it’s just money shifting around.
2. Companies give dividends (a portion of their operating profit goes back to owners), and those dividends can either be taken out of the market and put elsewhere or spent, or stay in the market and let it rise. If the latter happens, “new” money enters the market.
3. There are different ways money can be invested within a country, and the market is just one of them. Others are federal, state, or local bonds (basically borrowing money from the people), CDs, savings accounts, private equity, various other investments, or just held as cash. When the market becomes attractive, money comes out of those other investments and into the market, sending it up.
4. Money can be taken overseas to another currency, and just kept there. If you held Swiss Francs over the last year, it’s worth about 10% more dollars today than it was then. 10% is a pretty good return but maybe you think that rise is over, so you bring that back to dollars and invest in the US market, driving it up with that new value.
5. Money can be added to the supply by the federal Government and given to banks to lend out or otherwise inject in the economy. Borrowers can actually invest that directly into the market.
6. Various levels of government can directly buy shares in the market, either through a retirement fund, a stimulus package, or other mechanism, and tax dollars essentially get put in the market, coming from people’s paychecks.
7. The “unrealized” gains of investments are kept in the market, inflating it’s value. The theory is the market is always rational, but that’s in the long term. In the short term, you can have bubbles just because things are incorrectly valued, and it looks like the market is higher but the underlying value isn’t there.
8. ??? Probably others, too. Money is fluid, and “the market” is just one of many, many forms it can take, so it’s not a zero-sum game. Everyone’s GDP goes up, and although that’s not a perfect measure, one would expect in the long term the overall global markets to eventually rise similar amounts or better, depending on what value the companies in the market are making…
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.
fundamentally, it is people doing work adding value at a faster rate than destroying value (say by eating food or wearing down objects), but there are many layers beyond that.
If shareholders demand higher prices for their shares and others are willing to buy at these higher prices then the prices go up. You don’t necessarily need more money overall for that to happen.
The Federal Reserve printed trillions of dollars to stimulate the economy (quantitative easing) and gave super low interest loans to banks. Tech companies used these low interest loans to buy back all their stock, driving the value up. People sold their stocks, giving them more money to spend on houses and cars and more stocks—which further drives the price of those things up due to demand and competition.
You’re going to get a lot of authoritative sounding answers on this thread from people who have been reading other Reddit posts about the topic and really believe they know what they’re talking about 🤣
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