What is a Stock?

STOCK IS OWNERSHIP!

Along with ownership, a share of stock gives you the right to vote on management issues. Company executives work at the behest of shareholders, who are represented by an elected board of directors. By law, the goal of management is to increase the value of the corporation's equity. To the extent this doesn't happen, shareholders can vote to have management removed.

How is a Stock Valued?

The stock market is basically a daily referendum on the value of the companies that trade there. All those guys screaming at each other? Their job is to take in the day's news and distill it down to a single question: Will it help the companies I own make money in the future, or will it prevent them from doing so?

Earnings (a.k.a. profits) are the supreme measure of value as far as the market is concerned. Wall Street is obsessed with them. Companies report their profits four times a year and investors pour over these numbers - expresses as "earnings per share" - trying to gauge a company's present health and future potential.

The market rewards both fast earnings growth and stable earnings growth. Things the market will not tolerate are declining earnings or unexplained losses. Companies that surprise Wall Street with bad quarterly reports almost always get punished.

What About Risk?

While history shows that stocks will rise given the fullness of time, there are no guarantees - especially when it comes to individual stocks. Unlike a bond, which promises a payout at the end of a specified period plus interest along the way, the only assured return from a stock is if it appreciates on the open market. While many companies pay shareholders dividends out of their earnings, they are under no obligation to do so. The worst-case scenario is that a company goes bankrupt and the value of your investment evaporates altogether.

For all the risk, however, there are ways to manage your exposure. The best is to diversify by owning a variety of stocks. That way, no single company can hurt you.

The data and information on this site is provided for informational purposes only. It does not constitute investment, financial, or legal advice, and should not be relied upon in that respect. Always consult your financial adviser before making any investment decision.