Where Were Stocks First Created?
The concept of trading goods, which laid the foundation for where stocks were first created, dates back to the earliest civilizations. Early businesses would combine their funds to take ships across the sea to other countries. These transactions were either implemented by trading groups or individuals for thousands of years.
Throughout the Middle Ages, merchants assembled in the middle of a town to exchange and trade goods from countries worldwide. Since these merchants were from different countries, it was necessary to establish a money exchange, so trading transactions were fair.
As mentioned, Antwerp, or Belgium today, became the center for international trade by the end of the 1400s. It’s thought that some merchants would buy goods at a specific price anticipating the price would rise so they could make a profit.
For people who needed to borrow funds, wealthy merchants would lend money at high rates. These merchants would then sell the bonds backed by these loans and pay interest to the other people who purchased them.
Who Invented the Stock Market?
The first stock exchange in the world was created in Amsterdam when the Dutch East India Company was the first publicly traded company. To raise capital, the company decided to sell stock and pay dividends of the shares to investors. Then in 1611, the Amsterdam stock exchange was created. For many years, the only trading activity on the exchange was trading shares of the Dutch East India Company.
At this point, other countries began creating similar companies, and buying shares of stock was popular for investors. The excitement blinded most investors and they bought into any company that began available without investigating the organization. These days, this scenario is commonly referred to as a stock market bubble.
This resulted in financial instability, and eventually in 1720, investors became fearful and tried to sell all their shares in a hurry. No one was buying however, so the market crashed.
Another financial scandal followed in England shortly after — the South Sea Bubble. But even though the idea of a market crash concerned investors, they became accustomed to the idea of trading stocks, while keeping the risks of the market in mind.
How Does the Stock Market Work?
The stock market works by pairing buyers and sellers, who want to trade financial securities, and helping facilitate transactions. Or, in other words, a stock exchange or stock market is a physical or digital place where investors can buy and sell stock, or shares, in publicly traded companies, among other securities.
More stock market basics: the price of each share is driven by supply and demand, as well as investor sentiment, and domestic and global economic trends. Investors need to know what they’re willing to pay for a security (bid) and what a seller is willing to sell it for (ask). There are spreads between those two prices, but in the end, if the two come to an agreement, securities trade hands.
The U.S. stock market is volatile, too. The more investors want to buy shares (or, as demand rises), the higher the price goes. When there’s less demand, the price of a share drops. Prices or values of securities are almost always in flux, even when the markets are not officially open for trading.
And as for how investors make money? Generally, through asset appreciation, which is when an investor buys a security, that security increases in value, and then is sold. As such, investors can make money off of stock market fluctuations, though there are other ways to generate returns.
What Are Stock Market Indexes?
A stock market index measures the performance of a certain portion or subset of the overall market. Market indexes have many uses, and can come in many forms — there are indexes for assets from different parts of the world, from different industries, and so on. There are widely-followed market indexes, too, such as the Dow Jones Industrial Average, and the S&P 500.
History of Stock Market Indexes
As mentioned, the Dow Jones Industrial Average and the S&P 500 Index are two of the stock market’s most famous benchmarks, or barometers that try to capture the performance of the whole market and even the whole economy.
Founded in 1896 by Charles Dow and Edward Jones, the Dow is a price-weighted average. That means stocks with higher price-per-share levels influence the index more than those with lower prices. The Dow is made up of 30 large, U.S.-based stocks. It was designed as a proxy for the overall economy.
The Dow’s 12 initial components were mainly industrial companies, such as producers of gas, sugar, tobacco, oil, as well as railroad operators. It has since gone through many changes and now includes technology, healthcare, financial and consumer companies. General Electric was one of the original Dow members. Meanwhile, Procter & Gamble was added in 1932 and remains in the benchmark today.
Meanwhile, the S&P 500 index was created in 1923 by Henry Barnum Poor’s company, Poor’s Publishing. It began by tracking 90 stocks in 1926. Standard & Poor’s was founded in 1941, when the company merged with Standard Statistics.
Today, the S&P 500 is a market-cap-weighted index, meaning companies whose market value is larger have a bigger influence. Market value or market cap is calculated by multiplying the price-per-share by the number of shares outstanding. More so than the Dow or other gauges like the Russell 2000 Index, the S&P 500 has become synonymous among investors with the stock market.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
What Are Stock Market Cycles?
Speaking of markets being up or down, stocks and the market can fluctuate on any given day. The U.S. stock market has historically gone through larger market cycles in which the market expands and shrinks over the course of weeks or even years.
There are typically four stages to a market cycle: accumulation, mark-up, distribution and the mark-down phase, which can also be reflected in the performance of cyclical stocks. The accumulation phase happens when a market is at a low and buyers begin to snap up stocks at discounted prices.
At the beginning of the mark-up phase prices have been stable for a while, and more buyers start jumping on the bandwagon driving up the price of stock. At the end of this phase, as buyers jump in en masse, the market makes a final spike as it nears the top of a bubble. During the distribution phase sentiment becomes mixed, and in the mark-down phase, prices typically plunge.
Here are some of the most famous U.S. stock market cycles:
1. During the decade-long “Roaring 20s,” speculators made leveraged bets on the stock market, inflating prices. The rise in share prices was followed by the stock market crash of 1929. Share prices took years to recover.
2. Corporate buyouts and portfolio insurance helped prices in the market run up until Oct. 19, 1987 — what became known as “Black Monday” among stock traders and investors. Panic selling, along with computerized trading, caused the Dow to fall 23% in a single day.
3. Investors flocked to technology stocks during the Internet boom of the late 1990s and early 2000s. However, some of these companies weren’t profitable and didn’t have promising business models, causing the bubble to burst until 2002.
4. A rapidly growing housing market, along with the proliferation of mortgage-backed securities in the financial sector, helped cause years of stock market gains from the early 2000s to 2008. The market then crashed, leading to a deep recession. Shares didn’t start to recover until March 2009.
What Happens When the Stock Market Crashes?
A stock market crash occurs when broad-based stock indices like the S&P 500, Dow Jones Industrial Average, or the Nasdaq Composite experience double-digit declines over a single or several days. This means that the stocks of a wide range of companies sell off rapidly, generally because of investor panic and macroeconomic factors rather than company-specific fundamentals.
While no specific percentage decline defines a stock market crash, investors generally know one is occurring while it’s happening.
What Causes the Market to Crash?
Stock market crashes are usually unexpected and occur without warning. Often, crashes are caused by investor dynamics; when stocks start to sell off, investors’ fear takes over and causes them to panic sell shares en masse.
Though stock market crashes are usually unexpected, there are often signs that one could be on the horizon because a stock market bubble is inflating. A bubble occurs when stock prices rise quickly during a bull market, outpacing the value of the underlying companies. The bubble forms as investors buy certain stocks, driving prices up. Other investors may see the stocks doing well and jump on board, further raising prices and initiating a self-sustaining growth cycle.
The stock price growth continues until some unexpected event makes investors wary of stocks. This unexpected event causes investors to unload shares as quickly as possible, with the herd mentality of panic selling resulting in a stock market crash.
Catastrophic events such as economic crises, natural disasters, pandemics, and wars can also trigger stock market crashes. During these events, investors sell off risky assets like stocks for relatively safe investments like bonds.
Stock markets can also experience flash crashes, where the stock market plummets and rebounds within minutes. Computer trading algorithms can make these crashes worse by automatically reacting and selling stocks to head off losses. For example, on May 6, 2010, the Dow Jones Industrial Average fell 1,000 points in 10 minutes but recovered 70% of its losses by the end of the day.
What Is the Average Stock Market Return?
Based on historical S&P 500 data, the average stock market return is about 10% per year, or 6% to 7% after inflation (not accounting for fees, expenses, and taxes). While that’s the long-term average, annual returns often vary widely.
Average Stock Market Return
The average stock market return of the S&P 500 is about 10% annually – and 6% to 7% when adjusted for inflation. Of course, there have been years with much higher returns and years with much lower returns. Over the past 25 years, from 1998 to 2022, the market peaked at 32% (at the end of 2013) and bottomed at -37% (at the end of 2008).
For context, it’s rare that the average stock market return is precisely 10% in any given year. When looking at nearly 100 years of data, the yearly average stock market return was between 8% and 12% less than ten times. In reality, stock market returns are typically much higher or much lower.
Average S&P 500 Returns by Year (5-year, 10-year, 20-year, 30-year)
There is a silver lining to this constant stock market drama. If someone loses big in the stock market, there’s a chance they’ll gain their money back over time – with time in the market giving many investors an upside over timing the market.
That’s because many people typically don’t invest in the stock market for just one year. Instead, they invest for the long term in the hopes that the investments they buy today will be worth more years from now when they decide to sell. With that in mind, it may be helpful to look at the S&P 500 average return over the last 5, 10, 20, and 30 years to understand stock price movement.
By looking at shorter and gradually longer time periods, it’s interesting to see how different events have impacted market returns over the last three decades.
Average S&P 500 Return for the Last 5 Years
According to the S&P annual returns from December 2019 to December 2024, the S&P 500 average return for the last five years was 13.6% (8.9% when adjusted for inflation). It’s possible this figure may have been even higher if stocks’ performance overall had not been marked by pandemic-related volatility early in 2020, and a bear market and high inflation in 2022.
Average S&P 500 Return for the Last 10 Years
Looking at the S&P 500 from December 2014 to December 2024, the average S&P 500 return for the last 10 years is 11.3% (8% when adjusted for inflation). The stock market had its ups and downs over the decade, but the only years that experienced losses were 2015, 2018, 2022, with losses of 0.73%, 6.24%, and 19.44% respectively.
Average S&P 500 Return for the Last 20 Years
Looking at the S&P 500 from the end of 2004 to December 2024 the picture changes. The average stock market return for the last 20 years was 8.4% (5.7% when adjusted for inflation), which is lower than the average 10% return. That makes sense given that the United States experienced some major lows and notable highs from 2000 to 2009.
In early 2000, the market was doing exceptionally well, but from late 2000 to 2002, the dot-com bust contributed to losses for three consecutive years. That period wasn’t helped by the aftermath of 9/11 in 2001.
Then, in 2008, the financial crisis led to huge losses. And in 2022, due to high interest and fears of a recession, the market dropped sharply. Looking at these factors, it isn’t a huge surprise that the 20-year average stock market return is lower than the annual average.
Average S&P 500 Return for the Last 30 Years
Looking at the S&P 500 for the years 1994 to the end of 2024, the average stock market return for the last 30 years is 9% (6.3% when adjusted for inflation). Some of this success can be attributed to the dot-com boom in the late 1990s (before the bust), which resulted in high return rates for five consecutive years.
Why the S&P 500 Average Return Is Rarely ‘Average’
The annual average of 10% is not a reliable indicator of stock market returns for a specific year because outliers can skew the annual average. When the return is much higher or much lower than usual in certain years, those years are known as outliers.
For example, the average stock market return for the last 20 years may seem a little low at 8.4%, especially when compared to the return for the last 10 years, which was 11.3%.
But there were negative outliers that affected the 20-year average.
Dot-Com Bubble
Returns from 2000 to 2009 are perfect examples of outliers in the stock market. The late 1990s were the years of the dot-com bubble, when technology and website-based companies became hugely popular with investors. But in 2000, companies like Cisco and Dell placed huge “sell” orders on their stocks, and investors started panic-selling their shares.
This period is often referred to as the dot-com bust, and the market experienced annual losses for three years. In 2000, the average annual loss was 10.14%; in 2001, returns dropped by 13.04%; in 2002, they plummeted by 23.37%.
Financial Crisis of 2008
Another example of an outlier is the financial crisis of 2008. For years, banks had given unconventional loans to people with low income and bad credit so they could buy houses. As more people bought homes, housing prices increased drastically. People could no longer afford their homes, which put lenders in a tough spot.
The Fed proposed a bank bailout bill, but Congress denied the bill in September of that year, resulting in a market crash. Congress passed the bill in October, but it couldn’t immediately undo the damage on the stock market. In 2008, the market fell by a whopping 38.49%.
Market Recovery
The dot-com bust and the financial crisis of 2008 are two prime examples of outliers that have caused stock returns to drop more than usual. But in years following these negative outliers, the stock market soared.
Panic from the dot-com bust and other tensions finally started to calm down in late 2003, and the market return was 26.38% for the year. Annual average returns continued to trend upward for four more years, until the crisis of 2008.
After the market crashed in 2008, it bounced back with a return of 23.45% in 2009 and continued to rise for six years. The first loss was in 2015, and that was only a dip of 0.73%.
Steep drops are often followed by sharp gains — and by consecutive annual gains, even if they aren’t huge. People who panicked and sold their stocks in 2008 once share prices started to drop likely lost a lot of money. But those who held onto their positions probably increased their earnings by 2012, when market returns had finally increased enough to offset how much the market lost in 2008.
When the stock market experiences a negative outlier, it can be helpful to consider keeping the long game in mind.
What Is a Good Annual Return on Stocks?
When discussing the average rate of return on stocks and what you can expect, it’s important to be realistic. As mentioned, the stock market average return tends to hover around 10%, though when you factor in inflation, stock market returns tend to be closer to 6%.
Using the 6% figure as a baseline, an investor might choose to construct a portfolio that’s designed to produce that level of returns. If you’re invested in funds that track the S&P 500, then you’re more likely to realize stock market returns that fall within the average or typical range. Anything above 6% might be considered icing on the cake.
“While buying low and selling high is a good strategy in theory, timing the market generally does not work in practice. Rather than trying, focus on recurring contributions that utilize dollar cost averaging.”
-Brian Walsh, CFP® and Head of Advice & Planning at SoFi
If an investor is looking for above-average stock market returns, they might choose to take a more aggressive approach to building a portfolio, by looking at actively managed funds or momentum trading, for example, to try to capitalize on higher return potential. But those strategies can entail greater risk – and as always, there’s no guarantee that an investor will beat the market. Plus, active trading may mean paying higher expense ratios or commissions, which can eat into investment gains.
Using a buy-and-hold strategy and staying invested when the market moves up or down may help an investor realize consistent returns over time. With dollar-cost averaging, for instance, one would continue adding money to the market regardless of how high or low stock prices go. In doing so, they’d be able to ride the waves of the market as stock market returns increase or decrease, though they may not beat the market this way.
Taking this attitude can help an investor avoid falling into the trap of panic-selling when market volatility sets in. This is important because getting out of the market (or into it) at the wrong time could significantly impact a portfolio’s overall return profile.
Factors that Impact the Stock Market
It’s important to remember that some factors will influence the performance of individual companies more than others, or impact certain sectors more than others. All this can play into the so-called average returns of the stock market.
For example, if supply chains are disrupted, as they were during the global Covid pandemic, that can have an impact on manufacturing of various products; demand for those products; the price of consumer goods and commodities; and so on.
Higher employment rates or lower employment rates can also impact markets, as can inflation, interest rates, fears of recession, consumer debt levels, construction, and more.
Because the world is increasingly interconnected, markets that were once considered separate from the U.S. are now far more interdependent. The conflict in Ukraine has had far-reaching implications for Europe, the Middle East, as well as the U.S. and other regions.
As multiple companies’ share prices fluctuate simultaneously, the stock market as a whole can swing up or down. If a trade war or regional conflict or global pandemic affects companies’ production overseas, or consumers’ ability to spend domestically, numerous big businesses’ shares could drop, and the public could become uncertain about the U.S. economy.
As a result, the market could dip. When tariffs on imports and exports ease, some stocks can rise as traders anticipate reduced costs passed on to consumers and to businesses.
All this volatility affects stock market returns. When people wonder what their return will be, they’re asking how much they will have gained (or lost) in a year, or 10, 20, or 30 years. While everyone invests in different stocks and funds, a simple way to estimate how much you might gain — in order to make longer-term financial plans — is by looking at the average stock market return.
Measuring Growth in the Stock Market
How do people measure stock market returns? By looking at indexes. An index is a group of stocks that represents a section of the stock market, and there are roughly 5,000 indexes representing U.S. stocks. Investors may be familiar with the three most popular market indexes: The Dow Jones Industrial Average, Nasdaq Composite, and S&P 500.
When people refer to the stock market and the average stock market return, they’re likely referring to the S&P 500.
The S&P 500 index represents the 500 largest publicly traded companies, such as Microsoft, Apple, Amazon, Meta, and Alphabet. It stands for around 80% of the U.S. stock market, so the performance of this particular index is considered a good indicator of how the market is doing overall.
Future Stock Market Growth Predictions
As we can see from the outliers during the dot-com bust and financial crisis, when the stock market performs poorly, it tends to eventually bounce back. Similarly, if the stock market does exceptionally well, the market will eventually slow down and experience a loss. This can help with evening out the average return on stocks for investors.
The widely accepted rule is that if an investor’s rate of return is low now, they can expect it to be high in the future; if their rate of return is high now, they can expect it to be low in the future. Historically, the market balances out and experiences positive growth overall. Stock market returns increase around 70% of the time.
When share prices peak, then drop by 10% or more, that’s known as a stock market correction. If the market is doing swimmingly, investors can bet the market will correct itself by dipping.
All investments have risk, so there’s no way to guarantee a certain stock market return at all, let alone in a specific time frame. Numerous factors affect stocks’ performance, so it can be difficult to accurately predict how a stock will perform. And anyone who tells investors they can time the stock market to maximize returns is dead wrong.