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Why do Share Prices Rise Over Time?
Over time, the share market always rises. Is that true? And if it is true, why does that happen?
22 July 2024
Well, first up, the statement needs a disclaimer: *Does not apply to individual shares.
When “the share market” is being measured, the data usually tracks a basket of the top 500 US shares (typically the S&P 500). If a company fails, it will drop out of the top 500 and be replaced with a better-performing company. This basket of the top 500 shares has, on average, gone up by around 10% each year since 1928 – but that doesn’t capture every share, just the top ones.
Overall, share prices keep rising, although some years they’re up and some years they’re down. However, individual stocks can fall in value, usually if the business isn’t performing well. Sometimes the value never recovers; if the business goes bankrupt, for instance.
The second question is why do the top 500 shares keep gaining value over time? Well, you know how a $1 mixture got you a lot of lollies at the dairy when you were kid? And now you can barely buy a wine gum for that? Your parents will tell you that they loved a 50c mixture, and your great-grandparents might have bought a fat bag of lollies for 5p.
We keep improving our quality of life, increasing our disposable incomes, and contributing to ever-larger economies. The population grows, wealth grows, and prices slowly keep rising.
Alongside this growth, big companies keep innovating, problem solving, and creating more value all the time. They find ways to make and sell lollies more cheaply, so the company is more profitable.
All this means that over time companies continue to grow in value and share prices rise.
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