The stock market has long been an investor’s best friend.
When you invest in the stock market, you’re not buying a chart, you’re buying businesses. These businesses are ran by real employees who service real customers who pay with real cash. It’s the real deal.
Investing is a winner’s game. Buy a stock and you’ll be entitled to a share of any profits they make. Stocks tend to go up when they’re able to sell more products, expand to new markets, or are simply becoming more efficient. Sometimes companies don’t grow at all, and that’s fine! They’re still making money and will (probably) pay you a nice dividend.
We know why individual stocks go up, but what about a whole stock market? Let’s take a look at the S&P 500, the US flagship stock market index.
Source: Google.com
Look at those gains! And this occurred through tumultuous times too. We had the Black Monday crash of 1987, the tech bubble burst of 2000, the great financial crisis of 2007-2009, and even a global pandemic. The graph above contains 4 major stock market crash. One of which where investors lost 50% of their money!
It’s supposed to look scary isn’t it? Yet I don’t see any crashes on the chart, instead I see speedbumps. The next time someone tells you that investing in the stock market is risky, show them this chart and ask them: Where is the drop?
The data doesn’t lie, the stock market always went up over the long term. In this article, we’ll look at 8 reasons why the stock market always goes up.
Reason #1 - Population
Whether we like it or not, we live in a capitalist world and things cost money.
The world’s population is continually increasing. In additions, millions are lifted out of poverty every year. As a result, the number of consumers is continually increasing. More consumers means more sales. More sales means higher corporate earnings. Higher earnings means more profits for shareholder (you!).
Reason #2 - Inflation
Inflation is what we call rising prices. Whether it is cars, toys, cosmetics, or Mcdonald’s meals, any increase in price is considered inflation.
Whether we notice it, inflation is always there. Products are getting slightly more expensive every year. This translate in slightly higher corporate revenue each year, and thus slightly higher profits each year.
It’s a systematic factor that is easily overlooked, but if inflation averages 2%, its safe to safe that the stock market should go up by about 2% too.
Reason #3 - Productivity
Advancements in technology, automation, and management technique means companies are now able to produce more than ever before and at a cheaper cost. This means higher profit margins for business, and thus higher share price.
Hey, our salaries may not be keeping up with productivity, but at least our investments are! Make sure you’re on the right side of capitalism on this one, buy stocks!
Reason #4 - Salaries
With increase in population (and education) comes increased competition in the job market. This drives real (inflation adjusted) wages down and corporate expenses along with it. It’s now comparatively cheaper for companies to hire than it was in the past.
Once again, us salaried workers are getting the short-end of the stick. Make sure you become a business owner by buying stocks. If you can’t increase your salary, at least you can increase your investment income!
Reason #5 - Reinvested profits
The majority of businesses are profitable and they tend to re-inject their profits back into the business. This allows them to buy better equipment, hire additional staff, or develop new products. This helps companies grow and leads to higher sales (and thus profits) next year. These higher profits are generally linked with higher share price. Thus, the market keeps going up.
Reason #6 - Compounded growth
Businesses are able to repeat reason #5 every single year. This growth will snowball over time.
Reason #7 - Dividends
If companies are not re-investing their profits into their business, they tend to pay them out to shareholders in the form of dividends. This is where shareholders can take advantage of compound interest and re-invest their dividends too. This means that as long as a company is making money, its share price is either growing or the shareholder is getting richer through dividends, either way the shareholder (you) gets richer!
Reason #8 - Money supply
This one is commonly overlooked. Since 1973, we have effectively abandoned the gold standard and governments now have the ability to print as much money as we need. Since them, each time we encountered an economic issue, we printed money and threw money at the problem until it went away.
Here’s the thing: The money has to go somewhere. For example, let’s say you receive 600$ in stimulus and use it to buy an iPad, that stimulus now finds itself into the pocket of the manufacturer (Apple). Apple’s profits are now higher and thus the share price should follow.
In short, the system is rigged for gains!
Conclusion
There’s a multitude of reasons why the stock will always go up over time but I hope these top 8 reasons can convince you that investing in the stock market is a good idea.
Thank you for reading & happy investing!
Where there is a will, there is a way.