Stock Prices: Income vs. Growth

The price of an income stock tends to stay fairly flat. That is, from year to year, the price of the stock tends to remain about the same unless profits (and therefore dividends) go up. People are getting their money each year and the business is not growing. This would be the case for stock in a single restaurant that distributes all of its profits to the shareholders each year.

Let's say that the single restaurant decides, for several years, to save its profits, and eventually it opens a second restaurant. That is the behavior of a growth company. The value of the stock rises because, when the second restaurant opens, there is twice as much equipment and twice as much profit being earned by the company. In a growth stock, the shareholders do not get a yearly dividend, but they own a company whose value is increasing. Therefore, the shareholders can get more money when they sell their shares -- someone buying the stock would see the increasing book value of the company (the value of the buildings, equipment, etc.) and the increasing profit that the company is earning and, based on these factors, pay a higher price for the stock.

In a publicly traded company, all of the financial information about the company is public. The Securities and Exchange Commission (SEC) is in charge of collecting this information and making it available to investors. Shareholders also use a number of other indicators to determine how much a stock is worth. One simple indicator is the price/earnings ratio. This is the price of the stock divided by the earnings per share. There are all sorts of indicators like these, as well as a great deal of other financial information available on any stock. You can look up all of it on the Web in thousands of different places -- see the links at the end of this article for details.