What is a stock?

A share of stock is essentially a small piece of a publicly traded company that can be traded openly between different individuals. They can be traded on exchanges in most countries, but the largest exchanges, like the New York Stock Exchange (NYSE) are located in the United States. Stocks are identified by their ticker symbol, generally one to five characters. For example, International Business Machines is identified on its exchange as IBM.

Owning stock in a company also grants voting rights for some of the company's decisions, including elections for the Board of Directors - either at the annual meeting or by proxy.

For many years, stock ownership meant that an investor would receive a physical stock certificate, but in the digital world brokers keep the document "in street name" and investors receive a confirmation of ownership. It becomes the broker's responsibility to notify shareholders of corporate events, such as annual meetings.

How is stock valued?

The stock market itself is basically a daily referendum on the value of the companies that trade there. All those guys screaming at each other? Their job is to take in the day's news and distill it down to a single question: Will it help the companies I own make money in the future, or will it prevent them from doing so? If Microsoft loses a court battle to the Justice Department, look for its shares to fall. But if strong economic numbers come out promising better PC sales, traders will buy with a vengeance.

Earnings (a.k.a. profits) are the supreme measure of value as far as the market is concerned. Wall Street is obsessed with them. Companies report their profits four times a year and investors pore over these numbers -- expressed as earnings per share -- trying to gauge a company's present health and future potential.

The market rewards both fast earnings growth and stable earnings growth. Stock traders will even pay up for a money-losing company that promises to earn a lot in the future (witness 1998's explosion in Internet stocks). Things the market will not tolerate are declining earnings or unexplained losses. Companies that surprise Wall Street with bad quarterly reports almost always get punished.