Making Sense Of Stocks

You can't build serious wealth without owning shares in the market. Here's all you need to get started.

you’ll be glad to know that you’re in line for some very worthwhile benefits. First of all, you join a host of other shareholders as owners of a vital corporation, one that manufactures goods or provides key services, one that hires workers, buys equipment, and fans out across the globe in search of new markets; and hopefully one that knows how to turn a profit. And, there on the list of shareholders, you’re likely to be in good company, pardon the pun. You’ll join pension funds, money managers, mutual fund gurus, movie stars, and athletes, a host of groups and individuals who are looking to tap into a company’s growth while saving for the future.

There’s more, starting with a slice of your company’s profits, or earnings, as Wall Street likes to look at it. Shareholders get to benefit from a well-run company and its flow of profits in a number of ways. First off, companies with a history of strong earnings are likely to turn around and share a chunk of their intake with investors in the form of dividends. Quarterly, management will designate a set amount of profits to be distributed to shareholders, a reward for owning a stock. Stocks that pay dividends are a little like bank accounts: you get a predetermined rate of return for your investment.

Profits also help your stock investment to increase in value over time. Many stock market investors gauge the worth of a stock by the value of its parent company’s earnings. It’s only logical: Companies that bring in more money and retain a larger share of their sales have more funds for expansion. They can conquer new markets. They can hire more workers. They can increase dividends. They can take over other corporations and increase earnings as well. They can grow.

Most of the time when there’s an increase in the profits that a company pulls in, you’ll see its stock price climb. That increase, called capital appreciation, is the second-and arguably the most beneficial way-in which a stock makes money for shareholders.

There’s a potential downside, too. Don’t be fooled-stocks don’t always have to appreciate in value. Sometimes they slump. On occasion, individual companies fall behind the times. They lose ground to the competition or their products fall out of favor with consumers. Whatever the reason, that kind of sea change is bound to affect their profits, and soon enough the company’s share price as well. Read the financial pages of your local paper, or leaf through a publication like the Wall Street Journal or Barron’s and you’ll see accounts of companies that slip and see their shares slide.

How do you fight that? There are a couple of ways. For one, we recommend that you thoroughly look up and down any stock you’re about to buy. Read up on the company that has caught your interest. Request a prospectus, and see what management believes in. Compare key statistics with the broad market and with the company’s rivals in the same industry as

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