Valuing Stocks

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U03a2 Valuing Stocks- Jess

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.

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...
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