A stock doesn't have a fixed value. Instead, there are several ways to gauge its worth.
Price is one measure, with higher prices indicating greater value. Return on investment, or what you get back, is another.
The larger your return, the greater the stock's value. Some investors also look for consistency, or a history of strong
performance and steady growth. And stocks can also be compared to each other, to assess which is a wiser investment.
TRACKING A STOCK'S VALUE
The peaks and valleys of one
stock's price illustrate how value
can change over time.
Usually a stock climbs in price when the markets are strong,
the company is well-managed and its products or services are in demand. When the three factors occur together,
the increase can be rapid.
A stock's price generally moves up and down, even as it continues to increase in value overall.
For example, stock market activity might decline, company management could change, or a competitor could introduce a popular new
Nothing ultimately dictates the highest price a stock can sell for. As long as people are willing to pay more for it,
it will climb in value. But when investors unload shares or the market falls, prices can drop rapidly.
Following a price collapse, a stock can recoup its value or continue to decline, depending on its internal strength and what the markets are doing. In this example, the price moved up and down for several years at about $100, the level it had reached several
If a company is out
of favor with its shareholders, has
serious management problems or is losing ground to competitors, its value can collapse quickly even if the rest of the
market is highly valued. That's what happened here.
However, strong companies can cope with dramatic loss
of value and can rebound if internal changes and external conditions create the right environment and investors respond with renewed interest.
Stocks don't act alike. One basic
difference is how closely a stock's value, or price, is tied to the condition of
the economy. Cyclical stocks are shares of companies that are highly dependent on the state of the economy. When things slow down, their earnings fall rapidly,
and so do their stock prices. But when
the economy recovers, earnings rise
rapidly and these stocks recover. Airline and hotel stocks are typically cyclical: People tend to cut back on travel when the economy is slow.
|Stocks that pay
dividends regularly are known as
while those that pay little or no dividend while reinvesting their
profit are known as
TIMING IT RIGHT
The trick to making money, of course, is to buy a stock before others want it and sell before they decide to unload. Getting
the timing right means you have to pay
BETTING WITH THE ODDS
- The rate at which the company's
earnings are growing
- Competitiveness of its product or service
- The existence of new markets
- Management strengths and weaknesses
- The overall economic environment in which a company operates
Investors who buy a stock believe other people will buy as well, and that the share price is
going to increase. Investing is a gamble, but it's not like betting on horses. A long shot can always win the race even
if everyone bets the favorite. In the stock market, the betting itself influences the outcome. If lots of investors bet on
Atlas stock, Atlas's price will go up. The stock becomes more valuable because investors want it. The reverse is also true:
if investors sell Zenon stock, it will fall in value. The more it falls, the more investors will sell.
|If you're buying stocks for the quarterly
income, you can figure out the dividend yield the percentage of purchase price you get back through dividends each year.
For example, if you buy stock for $100 a share and receive $4 per share, the stock has a dividend yield of 4%. But if you get $4
per share on stock you buy for $50 a share, your yield would be 8%.
MAKING MONEY WITH STOCKS
Investors buy stocks to make money. One way is through capital gains, or making a
profit by selling stock at a higher price than you paid for it.
If you buy 100 shares of a U.S. company at $50 a share (for a total investment of $5,000), and sell it for $75 a share
(for a total of $7,500), you've realized a capital gain of $25 a share, or $2,500 before brokerage commission or taxes, if they apply.
A company's board of directors
decides how large a dividend the company will pay, or whether it will pay one at all. Usually only large, mature companies
pay dividends. Smaller ones need to reinvest their profits to continue growing.