Stocks & Stock Market
Common Stock : Ownership shares in a publicly held corporation
Financial Market : is a market where securities are issued and traded.
Primary Market : Market for the sale of new securities by corporations.
Secondary Market : Market in which previously issued securities are
traded among investors.
Initial Public Offering (IPO) : First offering of stock to the general public.
Seasoned Offerings : Sales of new shares by issuing additional shares.
Reading the Stock Market Listing
Dividend : Peridic cash distributionfrom the firm to its shareholders
Price-earnings (P/E) multiple : Ratio of stock price to earnings per share.
The high P/E Ratio suggests that investors think that the firm has good
growth opportinities
Moving Avarage (MO): Statistical moving avarage of the close prices in a given
period. In case the close prices cuts upper the MO signals buy; otherwise sell
Commodity Channel Index: Shows the upper and lower deviations from
statistical avarage and helps to follow cash flows to the stock. If it is below -100
signals buy; if it is over +100 signals sell.
Reading the Stock Market Listings
Relative Strength Index : measures the interior strength of
the stock. Generally it is callculated for 14 days. It signals buy
below 30 or sell over 70
Stochastic Oscilator : Compares the close price with the moving
prices in a given period. It signals buy below 20 or sell over 80
Volume : quantity of shares that is traded in a day in numbers or in
monetary value
Book Values, Liquidation Values, and Market Values
Book Value: Net Worth of the Firm according to the Balance Sheet
Liquidation Value: Net proceeds that could be realized by selling the
Firm’s Assets and paying off its creditors.
Market Value: is the amount that investors are willing to pay for the
shares of the firm.
Market price need not, and generally does not, equal either book
value or liquidation value. Unlike market value, neither book value nor
liquidation value treats the firm as a going concern.
Market Value Balance Sheet - Financial statement that uses market
value of assets and liabilities.
Valuing Common Stocks
Today’s Price and Tomorrow’s Price
Expected Return - The percentage yield that an
investor forecasts from a specific investment
over a set period of time. Sometimes called
the holding period return (HPR).
Expected Return = r =
Div1 + P1 – P0
P0
Valuing Common Stocks
The formula can be broken into two
parts.
Dividend Yield + Capital Appreciation
P1 – P0
Div1
+
P0
Expected Return
P0
Valuing Common Stocks
Dividend Discount Model
Computation of today’s stock price which states that share
value
equals the present value of all expected future dividends.
H - Time horizon for your investment.
P0
= present value of ( Div1, Div2,
P0 =
Div1
1+r
Div3,..., Divt,...,)
DivH + PH
Div2
+
(1 +
r)2
+...+
(1 + r) H
The value of a stock is the present value of the dividends it will pay
over the investor’s horizon plus the present value of the expected
stock price at the end of that horizon
Valuing Common Stocks
Dividend Discount Model

With no Growth P0 =
DIV1
r
With Constant Growth P0 =
DIV1
r-g
Expected rates of return = dividend yield + growth rate
With Nonconstant Growth
P0 =
Div1
1+r
+
(1 + r)2
PH
DivH
Div2
+...+
(1 + r) H
+
(1 + r) H
Growth Stocks & Income Stocks
Growth Stocks : The future growth of earnings
Income Stocks : Principally for the cash dividends
Plowing earnings back into new investments may result in growth in
earnings and dividends but it does not add to the current stock price if that
money is expected to earn only the return that investors require.
Plowing earnings back does add to value if investors believe that
the invested earnings will earn a higher rate of return.
Plowback or Retension Ratio : Fraction of earnings retained by the firm.
Payout Ratio : Fraction of earnings paid out as dividends.
g = return on equity * plowback ratio
There are no free lunches on Stock Exchange Markets
Technical Analysis:
Investors who attempt to identify undervalued stocks
by searcing for patterns in past stock prices
Random Walk : Security prices change randomly, with no predictable trends or
patterns
Fundamental Analysis:
Investors who attempt to to find mispriced securities
by analyzing fundamental information, such as accountiing
data and business prospects.
Efficient Market : Market in which prices reflect all avaliable information
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