This week Team B reviewed and discussed the "Concept Review Video: "Stock Valuation." In this video, a former lawyer by the name of Katherine Collins Lang now a private investor reflects on how her grandmother was the next door millionaire with a profession as a teacher. Her grandmother invested in the market with blue chip stocks, and they grew over time. Katherine Collins inherited the stocks and eventually sold off those stocks at a loss in the telecommunications industries in 2001-2002 when stocks were down. Katherine opted to keep some of the more common stocks such as Johnson & Johnson, General Electric and Exxon Mobil as this was Katherine’s first individual portfolio. In this video, Katherine discusses Stocks, Bonds and Stock Valuation.
How Markets and Investors Value Stock - Bond versus Stock
Katherine emphasizes that one should never lose sight of the fundamental nature of the stock market that is simply the pairing of the seller and a buyer. A stock is s a tiny portion of ownership of a company that will trade at the residual value after all obligations are paid (Parrino, Kidwell, & Bates, 2012).
A bond is merely a contract made for a set period such as ten or thirty-year note. Cash flows can be received that are set at five and ten percent at maturity the bondholder will receive the capital or principal back. If the company decreases by a quarter, the bondholder still has rights to the interest. Bondholders have less risk and receive payment before stockholders do (Parrino, Kidwell, & Bates, 2012).
There are some significant differences between Stocks and Bonds. Stocks are difficult, less quantitative, have more qualitative and have more factors to evaluate with more assumptio...
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...olio expenses and having trading expenses only (Parrino, Kidwell, & Bates, 2012).
Dividend Discount Model
As Katherine Lang mentioned in the video stocks can be valued by dividend discount models. The Dividends Discount Model looks at the stream of dividends such as those expected to grow over time, sets dividends along with future assumptions and discounts that back to today. This method is referred to as the terminal value that is what the stock expects to sell for at the end of the period. (Ro, 2013).
Research and evaluating the market is imperative when investing in the stock market. Individual investors do participate now by doing research by choice, and some are forced due to contribution plans for retirement purposes. Stocks and Bonds differ in benefits. Also, it 's important to remember that stocks are volatile, and bonds are long term.
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