Stocks are classified as part of the company's ownership. Once individuals buy shares, they are buying into the company's earning assets. Many large companies need funds to grow, so they sell their ownership in the form of shares. The more shares individuals buy, the more ownership the company owns. One of the main advantages of this investment is limited liability: in the event of bankruptcy, you are not responsible for any losses. Additionally, actions are associated with risks and rewards (Amadeo, 2011). It is very crucial to understand the risks and rewards involved in this type of investment. It is a fact that all investments carry some degree of risk. The most common threat in stock investing is losing money (Little, 2011). Additionally, stocks are bought and sold in a specific place called a stock exchange, conquered by traders who speculate on the price of stocks to make profits. The shares themselves are intangible assets and the annual profit distributed is called dividends. Additionally, the price of stocks depends on supply and demand in the market. Stocks are valued in two types, first by cash flow, sales or fundamental earnings analysis and the second valuation is the amount one investor is willing to pay for the stock and the other investor is willing to sell shares at a particular price or demand and supply of shares. (free financial advice, 2002). Stock forecasting is one of the controversial issues in finance. This particular essay will focus on the predictability of stock returns and market efficiency with a variety of financial and macroeconomic variables that include dividend to price ratio, earnings to price ratio, book value to market ratio, consumption. relative to wealth, short-term interest rates and dividend yield...... middle of paper ......andstockinvesting/f/Stocks.htmLittle http://stocks.about.com/ od/riskreward/a/ Understandrisk.htmFree financial advice http://www.free-financial-advice.net/stock-market.html#how the stock market worksGoyal.A and I. Welch, (2003), “Predicting the stock premium with dividend ratios", Vol.49, No. 5, pp.639-654Vol.56 journal of financeInvestopedia (2011)Fama.F, Eugene (1991), "Efficient Capital Markets: 11" Journal of Finance », Vol.46, No.5, pp.1575-1617Campbell, JY, Shiller, RJ, (1988) “The dividend-price ratio and expectations of future dividends and discount factors” Review of Financial Studies 1, 195 – 22Stock and Watson (1989), “New indices of coincident and leading economic indicators” Annual Macroeconomics [Online] Available at: http://rady.ucsd.edu/faculty/directory/valkanov/classes/mfe/ docs/sample_1.pdf [Accessed December 5, 2011]