When you watch financial news stations, the stock market can seem like a video game. Numbers turn from green to red while they go up and down, all while newscasters talk about how every bit of news affects market prices. But the stock market is much more than an interesting diversion. The stock market can create real wealth — wealth that funds long-term goals like retirement and college educations. The stock market also has another critical function, which is to raise capital.
Long-Term Wealth Generation
The stock market has the power to generate tremendous wealth over time. When compared to other assets, such as bonds, CDs, or cash, stocks have triumphed historically, with a long-term average return of 9.8 percent since 1928, according to a 2017 CNBC article. In spite of some occasional bear markets, in which the market drops by 20 percent or more, there has never been a 20-year period in which the stock market as a whole has lost money. There are risks in the market, and over the short-term, you can lose money, especially if you invest in individual stocks. However, if the market as a whole sticks to its long-term average of returning roughly 10 percent per year, you can expect it to double roughly every 7.2 years.
The stock market serves an important function as a way for companies to raise capital. When a company goes public, as the name implies, it sells shares to the public at large, rather than remaining a private company. This share sale can generate a tremendous windfall for the company. For example, when video streaming company Roku went public in 2017, the company raised $219 million in its IPO. In addition to providing a company with additional funds to increase its financial stability, IPO profits reward founders and early investors.
Corporations are often the subject of criticism and described as unfeeling institutions that only exist to make money. The truth is that when corporations do well, they generate an economic benefit for society as a whole. Company stock prices typically rise over the long haul due to earnings growth. If a company earns more money, it can hire more employees, pay higher wages and offer better benefits, and expand the products and services it provides. Take a company like Apple, for instance. Whenever the company releases a new product, such as a new iPhone, customers literally line up for hours or even days to be the first to own it. Without profits, the company would have no money for research or product development, and the iPhone wouldn't exist.
- CNBC.com: The S&P 500 Has Already Met Its Average Return for a Full Year, But Don't Expect It to Stay Here
- NASDAQ.com: This "Can't Lose" Investing Strategy Has Never Lost Money
- USAToday.com: 10 Stock Market Words You Need to Understand When the Dow Jones Turns Bumpy
- Kiplinger: How to Motivate Your Kids to Save and Invest: The Rule of 72
- Fortune.com: Roku's IPO Price Just Gave the Company a $1.3 Billion Valuation