The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money

Chapter 8. Stocks Are Worth Something

Getting a Piece of the Economic Action

Many folks view buying stocks as little better than gambling, and it's easy to understand why.

Stocks soar one day and sink the next, while billions of shares change hands and pundits wring their hands over the market's direction. Meanwhile, investors vacillate between delight and despair, last year's whiz-kid money manager becomes this year's whipping boy and the current hot stock turns into next year's bankruptcy filing. All in all, the market seems like one big crapshoot—and it's hardly surprising people shy away from stocks and stock funds, especially at times of market turmoil.

Yet there's more to stocks than ticker symbols, stock certificates, and ever-changing share prices. Stocks represent partial ownership in publicly traded corporations, offering a chance to share in global business prosperity. Expect world economies to continue growing? With any luck, stocks will go along for the ride.

Keeping Grounded

Indeed, as we're whipsawed by yo-yoing share prices, it's important to keep economic fundamentals in mind, so we stick with our stocks and have a shot at earning those impressive long-run gains. Over the 50 years through year-end 2007, gross domestic product climbed at an average 7 percent a year, according to the U.S. Department of Commerce's Bureau of Economic Analysis. That economic growth drove up corporate profits by 7 percent a year, which, in turn, propelled stocks to a 7 percent annual price ...