Dear Harry: I have never invested in anything except EE bonds and CDs. A while ago, I saw an interview on TV where the guy gave a lot of tips on how to invest in stocks, and now I'm almost ready to do it. I also did a little bit of browsing through some books at Barnes and Noble to get a better handle on what to do. For the last six months, I have been looking carefully at several companies on the New York Stock Exchange. One of them reported a gain in revenues for 2010 of 14 percent with a gain in income of 16 percent. That looks good to me. It means the company is improving in its sales and either reducing expenses or selling more of their most profitable products. The problem I'm having is related to the company's earnings per share. Instead of rising with the income, it has fallen from $3.68 per share to $3.12. Is the company giving me the straight dope? What am I missing here?
What Harry says: Earnings per share is ordinarily thought of as a simple division of the total income by the number of shares outstanding at the end of the year. While the numerator of that division is the income you saw, the denominator may very well not be the number of outstanding shares at the end of the year. There are modifications that can occur as a result of options to buy shares that the company has issued, as well as a change in the number of outstanding shares from the end of last year. In many ways this is a more significant figure than total earnings. Before you go for individual companies' stocks, may I suggest that you look at the performance of mutual funds? It's a better way to get started in stock investing.