Why People Buy Stock?

Pros and Cons

Why do people buy stock?

� When people invest in stock, they are looking

to get a return on their investment in two

ways:

1) Appreciation (Increase) of Value

2) Dividend Income2) Dividend Income

APPRECIATION

(INCREASE) IN

VALUE

� A stock appreciation (increase)is the difference between the price you paid for the stock and its current market price or value.

� If the price you paid for the shares is less than its current value, then the stocks value has current value, then the stocks value has appreciated (increased).

� If the price you paid for the shares is more than its current value, then the stocks value has depreciated (decreased).

DIVIDEND

INCOME

What is a dividend?

� Based on the performance of a company and other factors, a company may decide to issue a one-time payment or a dividend to all stockholders.

� This payment or dividend is given on a per share basis.

� The dividend amount is usually a very small sum.

Example:

� Phillips Morris Co. declares a 3 cent dividend

to all shareholders.

� If you only own two shares, then your total

dividend payment is 6 cents.dividend payment is 6 cents.

$.03

Dividend

2

Shares

$.06

Cents=x

Important Note:

� Start-up companies

rarely declare

dividends. If you are

looking for dividend

income, then you income, then you

should look at

established

corporations.

THERE ARE

ADVANTAGES

AND

DISADVANTAGES DISADVANTAGES

OF OWNING

STOCK

Advantages of Owning Stock

1. You own a piece (percentage) of a company.

Ultimately stock is an asset just like your

house or car.

2. Stock can appreciate in value.

3. Stock can give you current income via 3. Stock can give you current income via

dividends.

4. Usually yields higher returns than traditional

investments such as saving accounts, CD’s,

saving bonds, and money market accounts.

Disadvantages of Owning Stock

1. Stock can decrease in value.

2. If the corporation goes out of business, then your

stock in that company has no value. (ENRON)

3. Unless you own a significant amount of shares, you

don’t have much input in the everyday operation of don’t have much input in the everyday operation of

the corporation. You are basically placing your

hopes in the management team and the employees

of the corporation.

4. Riskier than traditional investments such as saving

accounts, CD’s, savings bonds, money market

accounts.

Summary

• People invest in stock to get a return in the

form of dividend income and appreciation of

the value of the stock.

• Stocks usually yield higher returns than

traditional investments.traditional investments.

• Stocks are riskier than traditional investments.

• Stockholders are considered owners of the

corporation.