| Contrary to popular belief, stocks are not just | | | | company! In other words, your one share doesn't |
| pieces of paper. When you own a portfolio of | | | | entitle you to much decision-making power with |
| stocks, you really own tiny fractions of several | | | | what is done with that $5.90. |
| companies. | | | | You might like them to buy more trucks, |
| If you think that this isn't the case, just ask the | | | | advertise more, or maybe even send you the |
| lucky owners of Petco or Reebok stocks. In each | | | | check for $5.90 (a dividend). But you're just a little |
| company's case, a larger company wanted to buy | | | | guy, and nobody listens to the little guy. You can, |
| them. The only way to take over a company | | | | however, vote in shareholder elections to decide |
| with publicly traded stocks is to buy all of the | | | | the corporation's board of directors. |
| shares. | | | | The owners of stocks oversee the board, the |
| If you had Petco and Reebok stocks at $20 and | | | | board oversees the CEO, and the CEO oversees |
| $35 apiece, would you sell them to a larger | | | | the company. That's how owning stocks works. |
| company for less than that? Of course not. For | | | | The Real Value of Stocks - When Stocks Buy |
| $20 and $35? Probably not, since if you wanted | | | | Other Stocks |
| those prices, you could have sold your stocks in | | | | So you can't decide what to do with Fed Ex's |
| the open market. | | | | $5.90 in profits, because you only have 100 votes |
| The only way for larger companies to take over | | | | out of 305 million (you get one vote per share of |
| smaller ones is to offer a premium to the owners | | | | stock that you own). But you know who could |
| of their stocks. In Petco's case, for example, the | | | | decide what Fed Ex would do? Someone who |
| stockholders received a 50 percent premium. | | | | owned all 350 million shares. |
| That means if you had $10,000 worth of Petco | | | | Let's say that the stock market took a real nose |
| stock, the very next day you would have had | | | | dive for some reason. That can happen. But let's |
| $15,000. Not bad for a day's work! | | | | also say that Fed Ex's business kept rolling along, |
| Big profits like this can only happen when you | | | | generating profits in the $1.8 billion range like it did |
| take the initiative to start investing in stocks. But | | | | in 2005. |
| if you still think that stocks don't have real value, | | | | How low could the stock go? Imagine the stock |
| read on. | | | | went from $112 all the way down to $45. Now its |
| What Gives Stocks Their Value? | | | | P/E ratio would be 7.6 (45 / 5.90 = 7.6), assuming |
| Stocks go up in value because they are in | | | | it continued to generate $5.90 in earnings per |
| demand. Stocks go down in value because they're | | | | share. At this price, the entire Fed Ex company |
| not in demand. This is the simple truth, but a | | | | might be an attractive acquisition candidate for |
| misunderstanding of it leads to the notion that | | | | someone like UPS. |
| stocks are "just pieces of paper." | | | | If UPS bought all 305 million shares of Fed Ex, it |
| Sometimes, stocks have an increased or | | | | could do whatever it wanted with that $5.90 - it |
| decreased demand for no good reason. But the | | | | would be money in the bank. Better yet, by |
| root value of stocks can be found in the value of | | | | reducing competition and eliminating some |
| their underlying businesses. | | | | overlapping costs, that $5.90 per share could |
| Stocks in Action - Fed Ex | | | | easily turn into $6.50. |
| For example, take a look at fairly stable company | | | | So how much would you sell your $45 share of |
| like Fed Ex (ticker FDX). It had annual profits of | | | | Fed Ex for? Less than $45? Of course not. You'd |
| $1.8 billion in 2005. Since Fed Ex has 305 million | | | | be surprised, but UPS might be willing to offer as |
| shares of stock outstanding, this equals about | | | | much as $65, if it thought it could get Fed Ex's |
| $5.90 earnings per share (EPS). | | | | profits up to $6.50 (thereby recovering their |
| Fed Ex's share price is around $112 per share. This | | | | investment in ten years). |
| means it's P/E ratio is about 19 (112 / 5.90 = | | | | Now you might be saying, "Hey, wait. I bought |
| 18.98), which is about the average P/E ratio for | | | | the stock at $112 and I'm supposed to be happy |
| stocks in the S&P 500. | | | | I can sell it for $65?" That's not the point. The |
| When you own a share of Fed Ex, you own a | | | | point is that stocks do have real value. If you're a |
| share of its profits. You own a share of the cash | | | | conservative investor, you want to buy stocks |
| in its bank account, and you even own a share of | | | | that are already beaten down and could potentially |
| its property, plant, and equipment. In the case of | | | | become acquisition candidates. |
| Fed Ex, you own a share of each of its trucks! | | | | Just the possibility that someone could acquire an |
| Now of course, if you own 100 shares of Fed Ex, | | | | entire company keeps stocks from falling too low. |
| that's only 100 shares out of more than 300 | | | | And that's what makes stocks more than just |
| million - even a million shares ($112 million worth) | | | | pieces of paper. |
| would be less than 1/3 of 1 percent of the | | | | |