Why is the stock market always rising?

Question

I asked myself: How is it that the stocks are always rising? How is money generated every year so that the value of a company rises?

I mean, at some point there is a finite amount of money in the system, isn't it? Right now people assume that the stock market is overheated and not many sources are left where money can come from to make it rise even higher.

Now my question is: How and where is money coming from? I know, people invest, but at some point they take money from point A to B and don't create it.

Is there a basic book out there which explains the basics? Not for dummies but also not for experts who assume to know everything. Maybe a pragmatic economics book?

Answer 1

How is it that the stocks are always rising?

Because companies generate value.

How is money generated every year so that the value of a company rises?

It isn't. Money is a measure of value, it is not value itself. Suppose you spend the day making a painting that's worth 100 dollars. You added one hundred dollars' worth of value to the economy, but you didn't add any actual dollars to the economy. There's no need for there an extra 100 dollars to be created for you to make the painting. If the market capitalization of a company rises from 10 billion dollars to 11 billion dollars, the amount of money that people are willing to pay for the company has increased, but the amount of money that exists hasn't increased.

I mean, at some point there is a finite amount of money in the system

Well, the money supply is generally increasing, but that's separate from the rise of stock prices.

Answer 2

Everything is relative. Specifically, relative to your unit of account. If we're talking dollars, the total stock of dollars (the usual metric is M2) increases basically every year. This leads to price inflation.

Without monetary inflation, prices would still change, but the general price level would not change on average. Some stocks might go up and some stocks might go down. The entire stock market might even go up. But one would not expect the entire stock market to increase in value ad infinitum. Instead, the value of the stock market would be relative to the rest of the economy. If companies in total are valued higher than other things in the market, stocks go up in general. If companies start being valued relatively less their price would go down.

Monetary inflation simply makes prices go up over time, and the stock market is one of those things were the prices go up. However, stock prices will go up faster than commodity prices in general because commodities have a downward pressure on their price because innovation is making things cheaper in general all the time, while companies create value and so there is an upward pressure on their price.

Answer 3

"Where Does Money Come From?" is what you need I believe:

Where Does Money Come From? reveals how, contrary to public perception, the bulk of today's money supply is created and allocated by commercial banks in their role as providers of credit. The authors argue that this system is inherently unstable, with little effective regulation of how much credit is provided or whether it is used for productive or speculative purposes. Based on detailed research and consultation with experts, including from the Bank of England, Where Does Money Come From? reviews theoretical and historical debates on the nature of money and banking and explains the role of the central bank, the Government and the European Union. This Second edition includes new sections on Libor and quantitative easing in the UK and the sovereign debt crisis in Europe.

The book also contains a lot of references for further reading.