Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 125

people's perception of their value, basically good guesswork. And you thought it was rocket science. And why would people buy these certificates? Because they would own a piece of the company and they may be able to sell their shares at higher prices once the perceived value of the stock rises.

Before you take my word for it on why people want to own stocks, let's look at it from a financial angle. Stocks, just like other financial instruments, are actually supposed to be bought by people for their income potential, known as dividends. The ownership of a company entitles the stockholders to share in the riches of the company (its earnings) paid to them in the form of dividends (we will cover dividends later on). Therefore financially speaking, stocks can be looked at as a source of income. The higher the company's earnings, the more dividends the stockholders would receive, commensurate with their number of shares. This is not unlike coupon payments on bonds, with the difference that while interests on bonds are a guaranteed fixed amount, dividend payments could vary depending on the company's earnings. That is why companies with a consistent earnings growth enjoy a higher demand for their shares and their shares move up in price. Companies who do not have any earnings may also see a rise in their stock prices, because investors may see a potential for good earnings at some point in the future. They bet their money on these companies, so they could have a share in the future earnings. The more investors believe in the future potential of a company, the higher the price of its stock will go. The question is what these potential earnings would be and if the stock price can be justified based on the earnings assumptions.

However, one look at the meteoric rise in the Internet stocks at the latter part of the 90s points to a temporary breakdown in this theory. People's expectations of the future potentials of these stocks had

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Table of Contents
Copyright and Disclaimer
Book Chapters
Table of Contents Copyright and Disclaimer Foreword Money
Bonds Futures Stocks Options
Mutual Funds Retirement Final Words Appendix A

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