Stocks 101

Stocks represent ownership of companies. Companies from small start ups to established multinational conglomerates can have stock available to the public. Stocks can also be called shares. To define the total value of a company, multiply the number of shares times the price of each share. For example, if a company has 1 billion shares available and each trades for $25, then the total value of the company is $25 billion dollars. Valuation of a company is based on multiple factors. The price of shares is based on the perceived value amongst many buyers and sellers. Each individual allocates cash towards a stock investment and enters orders through their brokers to buy shares in a company. Two basic ways to create an investment return is to sell shares at a higher price or earn dividends. Dividends are usually excess profits dispensed to shareholders. Significant economic trends, company events, earnings, dividends, psychology, and many other factors come together to move the price. One objective factor to value a company is its earnings. A company's total earnings divided by number of shares is the earnings per share. A price to earnings ratio is the price divided by earnings per share. A lower price to earnings ratio is preferred by value investors. Growth investors will be willing to overlook a high price to earnings ratio if the company is showing substantial earnings increases. Dividends can be considered a more objective measure than earnings since earnings can be manipulated by accounting but cash distributions to shareholders can not be manipulated. A company's yield is it's dividend per share divided by price.