When investors buy stock, there are several indicators that show how much that stock is worth. This information is available through the Securities and Exchange Commission (SEC), which gathers information on publicly held companies so that investors can review information on corporations they may wish to invest in. By looking up information on profits and growth of a company, investors can judge how much the stock they want to buy is worth to them in the long run, taking into account how much they are paying for each share. They can see reports that indicate if the company is growing, and therefore could potentially make more profits in the future, or if the company is just producing a steady income for its shareholders, remaining at the same level of earnings.
One of the ways investors can tell how much a stock is worth is by calculating the price to earnings ratio. The price of the stock is divided by the earnings per share. In a growth company, the price to earnings ratio is higher and the value of the stock rises because the company doesn’t pay out yearly dividends to the shareholders, but rather invests its profits in the company so that it grows and makes more profits. When the value of the company goes up, so does the value of its stocks and they can be sold for a higher price per share. Income stock means that the company's profits are paid to the shareholders every year as dividends, and money is not put back into the business. The price to earnings ratio stays the same because unless the company is making more profits, the dividends stay the same, and the value of the stocks doesn't go up.