Is it Necessary to Understand Why the Stock Market Goes Up?
Understanding why the stock market goes up can help potential investors assess the suitability of the stock market for helping them achieve their financial goals, and to determine when and how they can best participate in the market.
Does the Stock Market Always Go Up?
Now, as everyone knows, the stock market does not go up all the time. There are clearly some times when it goes down very dramatically, however, looking at the history of stock market prices, over a period of time, they continue to go up. Taking the Dow Jones Industrial Average, a stock index dating back to its creation by Charles Dow in 1896, as an indication, it is clear to see that the stock market has indeed risen exponentially over time.
In 1924, the Dow was closing at around the 100 mark; however this had risen to almost 400 preceding the 1929 market crash. The Dow finally rose above 400 in 1954, indicating that the market took a long time to recover from the crash of 1929. 1959 saw the Dow close at close to 700, following a very good decade in the stock market. The Dow experienced very substantial gains in the 1980s, closing the decade at over 2700. The 1990s also saw large increases in the Dow, and the close for 1999 was almost 11500. The Dow has been through plenty of ups and downs since the beginning of the 21st Century, including closing under 7000 in March 2009. In October 2009, the Dow regained a position of over 10000. As of this writing, the Dow is showing a value of over 18000.
The Reasons the Stock Market Goes Up
One reason the stock market goes up is that each and every company in which investors buy stocks is striving to succeed. Success means growth, expansion and profit, and with the growth expansion and profit that many of these companies attain over a period of time comes equivalent growth and profit for the stocks and the shareholders that comprise the stock market.
Another reason the stock market goes up is that the companies represented on the stock market do not remain stagnant. Some of them grow or morph, others disappear from the stock market and from existence and are replaced by new companies.
Why the Stock Market Goes Up At a Specific Time
The points above relate to the overall, continued upward movement of the stock market. It is also valuable to understand why the stock market goes up at specific times. There are many factors which affect the movement of the stock market; both upward and downward.
One very influential factor of why the stock market goes up (or down) is the actions of the Federal Reserve System (the Fed), especially the raising or lowering of interest rates. When interest rates are lowered, the economy usually benefits from increased spending, and in turn this is often accompanied by upward movement in the stock market.
Another influence on the movement of the market relates to the strength of the US Dollar. A strong US Dollar often attracts foreign investment in the US stock market, helping the market to move up, whereas a weaker Dollar may result in these investments being retracted from the US market, causing a market decline.
Inflation also has an effect on whether or not the stock market rises or falls. A fairly low inflation rate benefits the general economy, and subsequently the stock market. There are a myriad of other reasons that contribute to why the stock market goes up or not. Economic reports, politics, and local and global events all play a role in influencing the economy and the direction of the stock market.
Why the stock market goes up, whether in the overall, long-term scheme of things, or at specific times, is comprised of many factors. Understanding why the market always (eventually) goes up helps a trader to make their investment choices with an understanding of the probability that there will continue to be great opportunities available for profiting along with the market. Being aware of why the stock market goes up or down under certain conditions assists a trader in planning the timing of their trades to best dovetail with these market movements.