Stocks: An Introduction for Investors

Stock are one of the most popular and well-known investments. With your investment in a stock, you purchase shares in a company, or equity shares. The ensuing success or failure of said company equals your return on investment. The better the company performs, then the better your returns.

 

An investor can increase his or her stock investment via dividends or capital gains. When a publicly-treaded company does well, they may allocate earnings to shareholders by issuing dividends, either in the form of cash or through the repurchase of more shares. Stocks which pay dividends are particularly popular for retirees looking to produce regular income. If the value of a stock increases above the purchase price, then you can sell your shares at a profit. Said profits are known as capital gains. Conversely, if the value of your stock drops, then you have incurred a capital loss.

 

Dividends and capital gains are both contingent on the performance of the company, and by the stock market in general, which is also affected by micro and macro economic factors. Rises and cuts in interest rates, for example, can affect the value of your stock. Performance in the market can also be related to natural disasters, political and social conflicts, and various energy markets.

 

The stock market often trades cyclically in unpredictable patterns. Highs and lows, or Bull and Bear Markets, change in a few months or even a couple of years. You may see short-term ups and downs as the stock’s price moves within a certain price range, and longer-term trends over months and years, in which that short-term price range itself moves up or down. This is known as the stock’s volatility. Many investors, therefore, also try to diversify their investments, either in different sectors in the stock market, in bonds, or other in other forms of investment.

 

When evaluating a stock, many investors look at the stock’s earnings. Every publicly traded company reports earnings to the SEC on a quarterly basis in an unaudited filing. You can also look at the firm’s current earnings-per-share, or EPS. This ratio is determined by dividing the company’s total earnings by the number of shares. EPS is one popular indication of a company’s current strength. You can also divide the current price of a stock by its EPS in order to determine the price-to-earnings ratio, or P/E multiple, the most commonly quoted measure of stock value.

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