Determining stock value

Stocks don't have fixed values. A stock's price is ultimately determined by what investors are willing to pay to buy shares. Among the factors that affect the price of a stock are:

• The company's sales or revenue growth, sometimes called top-line growth
• The company's earnings growth, sometimes called bottom-line growth
• The way the company is managed
• The quality or advantage of the products or services it offers
• The condition of the economy and the financial markets
• The particular industry in which the company operates

Changing prices

Stock prices change according to the basic rules of supply and demand. For example, if a large number of investors buy Stock A, its price will be driven up because there are only a fixed number of shares available in the marketplace. The stock becomes more valuable because there is a high demand for it.

The reverse is also true. If the company that issues Stock A doesn't live up to the expectations that investors have for it, demand for the stock is likely to drop. That can prompt shareholders to sell their shares, increasing the supply and driving the price down.

If you invest in individual stocks, you have to be prepared for that ebb and flow, and should consider having a plan in place for how long you'll hold your shares if they lose value. One approach some investors use is sell a stock when it has lost 15% or 20% of the price at which they purchased it. Similarly, these same investors might sell a stock when it has increased 15% or 20% in value, and put the principal plus profit into another investment.