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As an investor, what importance do common stock prices have?

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smarta | Student, Grade 9 | eNotes Newbie

Posted December 2, 2010 at 9:03 AM via web

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As an investor, what importance do common stock prices have?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted December 2, 2010 at 9:11 AM (Answer #1)

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The main importance that common stock prices have for an investor is that they have a great deal to do with whether the investor makes money on his or her investment.

When you buy stock, you hope that the price of the stock will go up while you hold the stock.  This will allow you to make money when you sell the stock.  So once you own some stock, you want to pay attention to the price of the stock so that you can know when to sell it.

You should note that the price itself does not tell you whether to buy a stock.  You cannot just look at the stock and so "oh, it's cheap, I should buy it."  Instead, you need to look at other things so as to tell whether the stock is a good buy.

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krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted December 2, 2010 at 11:54 AM (Answer #2)

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Stock prices along with the dividend paid on stocks are the two most important factors that affect the return on investment earned by a person investing in stocks. The market prices of the stock of any company at which the stock can be purchased and sold changes from time to time depending on number of factors. The return on investment on the stock depends on the fluctuations in price between the time of purchase and sale of the stocks by the investor. In addition, the dividend paid on the stock during this period also adds to the profit.

An investor makes profit on investment when the total of the rise in price of the stock and the dividend paid is positive. The investor makes a loss when this sum is negative. Thus the investor must try and purchase and sale of stocks in such a way that stocks purchase give maximum return in form of price rise and dividend after the purchase. Also investor must try to sell off the stocks held if the market prices are likely to fall in future.

As can be seen from the above discussion, an investor must be more concerned with price fluctuations of the stock rather than the absolute price to make profit by way of increase in market price. However when considering the return by way of dividend, the absolute price is also important.

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