How Do Stock Market Returns Work?

Stock market investing involves owning shares in different companies or corporations. Investors can buy individual stocks through a brokerage account or own shares of a mutual fund or exchange-traded fund (ETF) that owns stock shares in a portfolio owned by the fund investors. The goal of stock market investors is to see the value of their stock or fund investments increase.

Market Value

• Individual stocks and the funds that own stocks each have a current share price. Investors who want to buy the shares purchase at the current share price, and investors who want to sell their shares sell at the current price. The share price of a stock can rise and fall during the stock market trading day and over periods of days, months and years. Current share value is based on the number of willing buyers and sellers combined with investor belief in the future potential of the company.

Effects

• The stock market consists of approximately 5,000 individual stocks. At any time, certain stocks are going up, while others are going down. The overall stock market moves up and down based on the total movement of individual stocks. When the market is moving up, more stocks have positive price moves than the number with falling prices. Investor should know that there may be a difference between the value changes of the overall stock market, different stock indexes and individual stocks or funds.

Function

• The return from a stock or fund investment is the difference between the price paid for the shares and the current price or sales price. If an investor purchases 100 shares of a stock for $10 per share, her initial investment is $1,000. If the stock price goes up to $12, the value of the investment has risen to $1,200, a $200 gain. If the shares are sold at $12, the gain is locked in. If the investor continues to own the shares, the value can continue to go up $12, increasing the return, or the share value may decline and some or all of the gain may be erased.

Additional Return Potential

• In addition to earning market returns from the price gains of stocks, investors can receive dividends from their stock or find investments. Stock dividends are a portion of the profits a company earns and pays out to investors in the company's stock. Many stocks pay regular dividends and can increase the dividend payout as the company's profits improve. The total return for a stock investor is any gain from the share price above the purchase price, plus dividends received from the stock.

Time Frame

• The return from stock investing can be over a wide range of time frames. Day- and swing traders buy stocks and hold them for a few hours or days with the goal of making a few cents to a few dollars per share. They realize their returns by selling the shares for a higher price than what they paid, if the stock does go up. Long-term investors can own stocks for many years. These investors look for returns that are multiples of the initial investment. For example, $1,000 invested in Coca-Cola stock at the beginning of 1990 was worth more than $65,000 in November 2010. This return amount doesn't include the thousands of dollars in dividends an investor would have also earned.