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Wealth is the last price paid
Ten rocks and a sale
Picture someone holding ten shiny rocks. A friend buys one for $1, so the collection is valued at $10: nine rocks for the owner, one for the friend. A passerby then offers $2 for a rock, and the owner accepts. At that latest price, the owner's eight rocks are worth $16, with $3 in a pocket, and the friend's single rock has doubled to $2.
Stocks priced the same way
Nothing about the rocks or the people holding them changed. Stocks are valued the same way, by applying the last traded price to every share outstanding. An investor's holdings can rise or fall daily on market sentiment while the business underneath stays exactly as it was, and someone could gain or lose millions in wealth just by sitting on their shares.
Where trillions come from
Headlines about trillions added to or lost from the stock market describe valuations on paper, not cash. The amount of money in the system pushes those prices around. After COVID, stimulus checks and central bank quantitative easing gave households more cash to bid for the same assets, which lifted prices and global net worth without creating anything tangible. That flood of money accounts for the $35 of new wealth the world created for every $1 of net new investment over the last 25 years.
How does quantitative easing lift asset prices?
A central bank creates reserves and uses them to buy government bonds and mortgage securities from banks and investors. The sellers are left holding cash and look for something that still pays a return, so they bid for stocks, corporate bonds, and property. The buying also pushes bond yields down, which raises the present value of every future payment an asset is expected to produce. The Federal Reserve's balance sheet grew from about $0.9 trillion in 2008 to roughly $9 trillion in 2022.
How do exchanges set a stock's price?
Exchanges match buy orders against sell orders, and the price of the most recent match becomes the quoted price. A company's market capitalization is that price multiplied by its shares outstanding. On any given day only a small slice of the shares changes hands, so a limited number of trades sets the value for all of them. Most funds value their holdings each day using the closing price.
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