Many corporations also give stockholders dividend payouts. These dividend payouts will change based on how profitable the company is.
Stocks are bought and sold throughout the day on a stock exchange. The two stock exchanges in the U.S. are the New York Stock Exchange and the NASDAQ. For this reason, the price of a share of stock goes up and down depending on the demand. Stock prices can therefore be affected by corporate earnings, public relations announcements, and the health of the US economy overall.
Therefore, you can make money from stocks in two ways: from dividend payments, or by selling it when the price of the stock goes up. However, keep in mind you can also lose your entire investment if the stock price plummets.
What drives demand for a stock? Underlying it all is expected earnings. If investors think the company's earnings will rise, they will bid up the price of the stock. Second is whether the current price is low compared to the company's earnings. This is measured by the Price to Earnings Ratio, or P/E Ratio. Third, is expected growth of revenue, even if the earnings aren't there yet. This can happen with a new company that has a lot of promise. Investors may have a lot of irrational exuberance over being in on the ground floor of this type of company, and bid up the stock price. This can create a bubble, which becomes a self-fulfilling prophesy.
Stocks are first issued in a company's Initial Public Offering, or IPO. Before the IPO, the company is usually privately held, and finances itself through internal corporate profits, bonds and private equity investors. It will decide to "go public" for several reasons. First, it may wish to expand and needs the huge amount of capital received in an IPO. Second, many companies offer stock options to their early employees as an incentive to come on board. That's because many start-ups don't have the cash flow to pay highly skilled executives. However, the promise that they will make millions once the company goes public can be enough to bring them on board.
Third, the founders may wish to cash in on their years of hard work. They typically award themselves larges amounts of stock in an IPO, which is typically worth millions of dollars. Of course, they are usually prohibited from selling it right away. Furthermore, they don't want to sell their stock all at once, since this would be interpreted as a loss of confidence in the company. Over time, however, they can sell their stock. This leads to a third reason why a company may go public, and that's to allow the owners to diversify their financial portfolio. In other words, they don't have all their finances tied up with their companies.