Earnings and performance

Investor enthusiasm for a stock can sometimes take on a momentum of its own, driving prices up independent of a company's actual financial outlook. Similarly, disinterest can drive prices down. But to a large extent, investors base their expectations on a company's sales and earnings as evidence of its current strength and future potential.

When a company's earnings are up, investor confidence increases and the price of the stock usually rises. If the company is losing money — or not making as much as anticipated — the stock price usually falls, sometimes rapidly.

Here are the dividends

The rising stock prices and regular dividends that reward investors and give them confidence are tied directly to the financial health of the company.

Dividends, like earnings, often have a direct influence on stock prices. When dividends are increased, the message is that the company is prospering. This in turn stimulates greater enthusiasm for the stock, encouraging more investors to buy, and driving the stock's price upward.

When dividends are cut, investors receive the opposite message and conclude that the company's future prospects have dimmed. One typical consequence is an immediate drop in the stock's price.

Companies known as leaders in their industries with significant market share and name recognition tend to maintain more stable values than newer, younger, smaller, or regional competitors.

There have always been speculative bubbles — periods when stock prices have risen to unsustainable levels on investor optimism. The late 90's was one such period, as were the bull markets of 1970 to 1972 and 1982 to 1987. Usually, a period of very high stock prices is followed by a period of depressed prices. Stocks become undervalued — or fall lower in price than a company's prospects would seem to warrant — when investors overreact to negative news, such as a company profit warning, rising interest rates, or political or economic upheaval at home or abroad.

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