How Does Stock Have Value?

In this episode of Financial Clarity for Doctors, Rachelle and Corey talk about the hypothetical value of shares of stock.  Sometimes financial markets can feel very opaque and mysterious, and that’s for good reason!  This is confusing sometimes!  But when you buy a share of stock, you are buying something that is backed by tangible goods and services.  It’s real, but still very hard to determine its worth.

The value of stock is:

• Driven by the goods and services provided by the company behind it.
• At any given time, the value is the price that a buyer and a seller can agree is fair.
• There are two main ways that a shareholder can earn money from owning stock, which influences how much they may pay for that share:
  • Dividends are profits that are distributed by shareholders.
  • Stock price appreciation is when the value of the stock itself goes up. You realize gains, when you sell your shares when the price is higher than what you paid.  You can also lose money!
• Human nature makes things more complicated!
  • People get excited about new companies doing new things.
  • Personal values can influence whether you think a company’s stock is worth buying or not.
• When deciding a fair price for buying and selling stock, larger buyers and sellers have an advantage. Retail investors generally don’t.

It can be very exciting to buy and sell individual shares of stock, but that is partially because it is much riskier than buying shares of an index fund.  You can do a lot of math to determine if you’re buying at a fair price, but you have no control over what other people will think is a fair price in the future.  More diversified investments are less exciting, but also less risky.

For more financial planning tips from Corey and Rachelle, find them on social media!
LinkedIn: @CoreyJanoff and @RachelleVanderzanden; Instagram: @CoreyJanoff and @VanderzandenRachelle; and Twitter: @CoreyJanoffCFP and @RachelleFinance 

Discussions in this show should not be construed as specific recommendations or investment advice. Always consult with your investment professional before making important investment decisions. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Finity Group, LLC and Cambridge are not affiliated. Cambridge does not offer tax or legal advice.