Investing Basics flipbook_2024

What Drives Stock Prices? When you buy an individual stock, you are actually buying a piece of the company. As a partial owner, you have the potential to make money if the company does well and the potential to lose money if the company does poorly. If a company is profitable, it may decide to reinvest profits back into the business or pay dividends to shareholders from its earnings. In theory, if a company experiences a period of increasing or decreasing revenues and profits, the value of the company’s stock would go up or down — perhaps proportionately and perhaps not — to reflect the changes. When the price that investors are willing to pay for a stock becomes disproportionate to the underlying company’s earnings, the stock may be referred to as “overvalued” or “undervalued.”