Chapter 4Viewing Stocks through a Balanced Portfolio Lens

An investment in a stock represents an equity ownership in a public company. This is why stocks are also referred to as equities. If you buy Google stock, for example, you instantly become a part owner of Google. As an owner of the company, you benefit from the company's profits, which are largely reflected in the price of the stock. The current price of the company's stock reflects future expectations of the company's fortunes. When profits surprise to the upside, the stock price rises, and vice versa. Google is one company. The broad stock market consists of a basket of publicly traded companies like Google.

Most investors already understand what a stock is and what makes up the stock market. However, as you will read in this chapter, the traditional perspective of how to think about stocks within a portfolio contains many oversights.

Introduction

When people ask how the market did today they are undoubtedly referring to the stock market, even though there are many markets to consider. The vast majority of headlines, analysis, and conversations are about how the stock market is faring. Bond, commodities, and real estate markets are just a few of many other major markets that do not seem to receive the same attention as stocks. For some reason our nation is gripped by the stock market (more so when it is going up than when it is not doing well, of course).

Consequently, equities are a staple in nearly every long-term ...

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