As owners what rights and advantages do shareholders obtain? What are disadvantages of owning stock?
They are able to participate in the economic growth of publicly traded firms without having to manage business entities directly. They have the right to residual cash flows of corporate profits and often receive some of these cash flows through dividends. In addition, shareholders vote on the members for board of directors and other proposals for the company. Shareholder capital losses are capped in that they can only lose their initial investment. Stocks are very liquid and investors can enjoy this liquidity in both their entrance into the stock market and their exit from it. A disadvantage of owning stocks is that stocks are not guaranteed to return anything to the investor while the coupon payments and principal of bonds are, high returns is greater with stocks but there is a possibility of losing money.
Why might the Standard and Poor’s 500 indexes be a better measure of stock market performance than the Dow Jones Industrial Average? Why is the Dow Jones Industrial Average more popular than the Standard and Poor’s 500 indexes?
The Standard and Poor’s 500 is a broad market index that includes stocks of the 500 largest US firms from ten sectors of the economy. It captures 80% of the overall stock market capitalization and is a good proxy for what is occurring in the overall stock market. The Dow Jones Industrial Average has been used for a longer period, around the mid-1880; it represents the activity of the thirty largest corporations in the US, covering 30% of the stock market. Its popularity rises from it being the first index used by the media.
The Term Paper on Stock Market Crash of October 29, 1929
The year is 1929 and you're living life to the fullest possible. You are finally able to walk down the street in a fur jacket and diamond rings and hand 20$ bills to the bums of the city if you wanted to. It wouldn't be much use, because they would be nearly as rich as you would be. Even the people in poverty were somehow involved with or put money into the stock market. Nothing said you had to ...
What are the differences and similarities between common stock and preferred stock?
Common stock is an ownership stake in a public corporation. Common stock dividends change over time, hopefully increasing in the long-term. Preferred stock is a class of stock with fixed dividends. Preferred stock pays a constant dividend. Preferred stockholders have higher precedence for payment in the event of firm liquidation from bankruptcy. However, preferred stockholders do not have voting rights that common stock holders enjoy. Preferred stock prices fluctuate with market interest rates and behave like corporate bond prices. Common stock prices change with the value of the company’s underlying business. The similarities between the two are preferred stock is as a security with characteristics somewhere in-between a bond and a common stock. Both represent the ownership of a company.
On January 16, 2007, the Dow Jones Industrial Average set a new high. The index closed at 12,582.59, which was up 26.51 that day. What was the return in % of the stock market that day? What are the three most recognized U.S. market indices?
FV = PV × (1 + i)
12,582.59 = (12,582.59-26.51) × (1 + i)
i = (12,582.59/12,556.08)-1 = 0.2111%
Three most recognized markets: NSE-New York Stock Exchange, AMEX, NASDAQ
At your discount brokerage firm, it costs 9.50 per stock trade. How much money do you need to buy 300 shares of Time Warner, Inc., which trades at 22.62? State based on the amount of commission paid, whether a traditional full-service broker or a discount broker is being used.
($22.62/share x 300 shares) – $9.50= $6,776.50
Discount broker is being used.
Financial analysts forecast Safeco Corp. growth for the future to be a constant 10%. Safeco’s recent dividend was 1.20. What is the value of Safeco stock when the required return is 12%?
The Essay on Preferred Stock Versus Common Stock
The primary advantage to an investor of holding preferred stock compared with common stock is that the preferred stock return is somewhat more predictable (more certain). The issuing company will generally make a real effort to try to avoid defaulting on the preferred stock dividend. Since the return to preferred stock is reasonably well defined and since the preferred stockholders precede the ...
P0= D0 (1+g) = $1.20 (1+ 0.10)= $66.00
i-g 0.12- 0.10
A preferred stock from Duquesne Light Company pays 2.10 in annual dividends. If the required return on the preferred stock is 5.4%, what is the value of the stock? Why is the growth rate on the preferred stock dividend a 0%?
The preferred stock growth rate equals zero.
P0 = D0 (1+g) = $2.10 = $38.89
i-g 0.054-0
Ultra Petroleum has earnings per share of 1.56 and a P/E ratio of 32.48. What is the stock price? Explain why the P/E model computes what is referred to as the stock’s relative value?
Pn= (P/E)n x En = 32.48x 1.56= $50.67
The P/E ratio multiplied by a firm’s earnings result in the stock price. For example, if a firm is experiencing high growth and all other factors are held constant, this will lead to a higher P/E ratio reflecting the growth prospects. Stock prices can change simply because the market changes the P/E ratio appropriate for that stock.
