Stock is an interest in the ownership of a company. So, when you buy a stock, you are purchasing the company's entire operation, its proceeds and its liabilities. This includes earnings (profits), losses, liabilities, debt... everything.
One word: returns. We invest in stock because the investment is likely to earn more money through returns. There was a time when the main returns from stocks came from dividends, which are a company's payment of a portion of its profits to shareholders.
Now, however, dividends are only a small part of a stock's potential returns, and some companies do not even pay dividends at all.
Rather, returns today are largely due to an increase in the value of the stock itself. That is, investor demand for a company's stock drives its share price up.
Here's where it gets tricky. Not all stocks are good investments, and every stock has the potential to be a bad investment, no matter how successful the company is. Even Microsoft, the clear market leader in consumer operating system software was a bad investment in 2000, because investor demand had so inflated its price. If you had purchased $1,000 of Microsoft stock at its peak in 2001 you'd have a little over $500 in 2006. And Microsoft has been a profitable company. There are two important factors most stock investors use to evaluate stocks, and they have evolved into the two main schools of investing: growth and value.
Growth investing focuses on the stocks of financially healthy companies that have exhibited consistent earnings growth over time. Looking at a company's past earnings announcements and seeing that, year over year, the company has posted increasing earnings is a sign that the company is healthy and will continually produce increased earnings. As a result, investor interest will increase and the stock price will rise.
Value investing focuses on the price of a stock and its relationship to the underlying company's financial health and earnings outlook. Value investing relies on the theory that there are inefficiencies in the stock market that can be exploited. Sometimes a stock will be ignored or overlooked by the investing community as a whole, and as a result the stock will be undervalued. Eventually, of course, investors on the whole will take note and the stock price will rise to a more appropriate price.
Not all stock investors fall into the clearly defined categories of growth or value. In fact, there is often disagreement over which category a stock belongs in.
Some investors will focus on an individual sector, such as Biotechnology. Other investors will focus on distressed securities, the stock of companies which have fallen into financial trouble and whose stock has plummeted as a result.
There are a few qualities that all good stock investors share: