What Stocks Really Represent

What Stocks Really Represent

Why do people buy stocks? Because they go up?

Why stock prices are volatile

How to value growth stocks

What drives stock prices

Are stocks worth their book value?

Why do people buy stocks? Because they go up?

One of the best reasons to buy stocks is because they offer inflation protection

Why stock prices are volatile

Stock prices are volatile because of the principle of compound growth

Small changes in interest rates or growth rates can greatly affect a stock's price

How to value growth stocks

One way is to use a dividend discount model

What drives stock prices

Market interest rates

Expected growth rate of the stock

Are stocks worth their book value?

Book values have little relation to a stock's price

Many assets have been on the books for years and the book value no longer reflects market-place value

Be concerned about the future earnings those assets can generate

The average stock sells at about three times book value

Stock prices are generally based on the company's future earnings

The value of the company's current assets play a small role

Many of the newer companies like Microsoft have very few physical assets but a great ability to generate earnings from intangible assets

However if a company is in dire straits, the company's assets and book value may determine its stock price