Why Do Stocks Go Up?
This isn't a trick question or a complicated question. The answer is: because the company's earnings go up. The long answer is that stock prices are the world's way of appraising the value of the company in which they own stock. The most consistent and reliable signals of a company's value are the level and trends of its earnings over time.
That means stock prices rise over time because that's what the earnings of good companies do. However, they don't always go up relative to the earnings. Earnings will go up and down over time and economic cycles. Stock prices can go up and down over time based on investor emotions which almost always go to extremes.
You can also have a company with below average earnings that will have an increase in stock price based on customer emotion or belief that the earnings will increase or because of government subsidies or various other subsidies.
Example Of A Company With Below Average Earnings That Has A Stock Price That Increases
Name this company if you can. Answer is at the bottom of the blog page.
This company is one of the most famous brands in the United States and the world. Their stock went up 743% in 2020 making them one of the most valuable companies in the world. Their net income in the first quarter of 2021 was $438 million which is respectable, however, $518 million of their income came from regulatory credits enforced by our government and another $101 million came from selling Bitcoin. So if this company had to rely on product sales only they would've posted an earnings loss in the first quarter. But their stock continues to go up. Why?
Because as we mentioned above earnings aren't the only reason a stock price goes up. You can have a company with below average earnings have an increase in stock price based on customer emotion or belief that the earnings will increase or because of government subsidies or various other subsidies.
Stocks go up and down for a variety of reasons, however at 80/20 Financial we base our investment philosophy on the belief that the fundamental long term link between company earnings and stock prices is unbreakable over the long run. Stock prices rise over time because that's what the earnings of good companies do. This is why we invest your money and our own money in the best companies in the United States and the world. We don't base our investment philosophy on the latest fads nor do we change our philosophy based on the latest fears. We don't believe in creating wealth quickly, we believe in creating wealth for certain.
You Need A Plan
At 80/20 Financial Services we specialize in helping cooperative employees plan their retirement. We can show you how to turn your 401k and your R&S lump sum into a stream of income just like when you were working while also helping you achieve your desired financial outcomes in retirement.
If you are retired or nearing retirement, we can create a plan which will outpace inflation and accomplish any other retirement goals you might have. The consultation is free and without obligation. Contact us to set up a consultation.
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80/20 Financial Services is an Independent Registered Investment Advisory Firm. We help Electric Cooperative Employees create their retirement income and investment plans.
*Answer to the mystery company referenced above: Tesla.
Photo by Joshua Mayo on Unsplash