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Stock Valuation - Essay Example

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In order to assess stock, assumptions are inevitable. Assumptions result to differences in opinions amongst people in the stock market. The two basic approaches for valuing stock are…
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Stock Valuation
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Stock Valuation al Affiliation) Due to its minor quantitative nature, it is effortful for markets and investors to value stock. In order to assess stock, assumptions are inevitable. Assumptions result to differences in opinions amongst people in the stock market. The two basic approaches for valuing stock are the ratio-based and the intrinsic value approaches (Damodaran, 2007). The former is the simplest measure in stock valuation, for this reason it is common. Common and preferred stocks are the two kinds of stock.
An equivalent value of stock by every investor is controversial in relation to the different kind of stocks aforementioned. Common stockholders are entitled to voting where shareholders come together and are recipients of dividends while a preferred stock is a bond at the same time, that is, it is a cross between a common stock and a bond (Damodaran, 2007). Some of its characteristics include scripted return, lack of maturity in most cases, ability to recover as a mature bond and conversion to a common stock.
In case of company bankruptcy, preferred stock holders are a priority in the payment of liquidated assets then the common stockholders. A direct implication of this is that the former mentioned stock preference is high regarding liquidation and some of its dividends are preferred. There are instances where dissolving a company results to no payments to the common stockholder. Therefore holding the same value for stock by investors goes against the principles of the two kinds of stocks in discussion. An imbalance of the stock market is therefore inevitable in the long run.
Reference
Damodaran, A. (2007). Valuation Approaches and Metrics: A Survey of the Theory and Evidence (p. 92). Now. Read More
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