The Wall Street Journal. Guide to Understanding Money Investing in Asia
The Value of Stock
A stock's value rises and falls depending on market conditions, investor perceptions and other factors.
Tracking a Stock's Value
Cyclical Stocks
Timing It Right
Betting with the Odds
Making Money with Stocks



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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.

Year 2
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.
Year 4
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 product.
Year 5
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.

Year 10
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 years before.
Year 12
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.
Year 14
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.

CYCLICAL STOCKS
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
INCOME STOCKS,
while those that pay little or no dividend while reinvesting their profit are known as
GROWTH STOCKS

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 attention to:

BETTING WITH THE ODDS
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%.
Purchase Price Annual Dividend Yield
$100 $4 4%
$ 50 $4 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.

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This page was last updated: July 2000