An example of this concept would be if an individual or company invested an amount saved over the course of a year. While investing may be riskier, these individuals hope that the investment will yield a greater return than leaving the money in a savings account drawing nominal interest. In this example the companies that issue the stocks or bonds have spending needs that exceed their income so the company will finance their spending needs by issuing securities in the capital markets. This is a method of direct finance because the "companies borrowed directly by issuing securities to investors in the capital markets" (Woepking, ¶5).
Significance of Stocks in Personal Finance Personal income is considered to be a person’s total earnings which can be obtained through wages and salaries, personal business activities, social aid and investment. The choice to invest one’s finances rather than spend on consumption has an overall impact of increasing income as a result of future cash inflows from the invest... ... middle of paper ... ...g is also important in fulfilling financial obligations such as debt capital, annuities as well as savings. An effective personal financial plan should manage risk through diversification of investment capital, and the stock market provides investors with a viable option for diversification. Investing in stocks is considered one of the most profitable alternatives of personal financial planning, and is generally included to financial plans as an investment vehicle for additional income streams. Investing in stocks also has several benefits, key among them being increasing current and future cash inflows from investments.
To get an estimate of the securities suitable for certain levels of risk tolerance and to maximize returns, investors should have an idea of how much time and money they have to invest and the returns they are looking for (Investopedia.com, 2006). MODERN INVESTMENT THEORY Modern Investment Theory also known as Modern Portfolio Theory (MPT) was introduced by Harry Markowitz with his paper "Portfolio Selection," which appeared in the 1952 Journal of Finance (riskglossary.com, 2006). Prior to Markowitz's work, investors focused on assessing the risks and rewards of individual securities that offered the best opportunities for gain with the least risk and then construct a portfolio from these (riskglossary.com, 2006). MPT is defined, according to investorwords.com (2005), as an overall investment strategy that seeks to construct an optimal portfolio by considering the relationship between risk and return, especially measured by alpha, beta, and R². MPT utilizes several basic statistical measures to develop a portfolio plan (Gitman, et al, 2005).
Should financial decisions be put on hold until the markets become stronger? Is it more profitable to act now to better position the company’s market share?” These are all questions that could be clearly answered if the managers had a magical financial crystal ball. In lieu of the crystal ball, managers have a way of calculating the financial risks with some certainty to better predict positive financial investment outcomes through the discounted cash flow valuation (DCF). DCF valuation is a realistic approach, a tool used, to “determine the future and present value of investments with multiple cash flows” over a particular period of time which is incurred at the end of each period (Ross, Westerfield, & Jordan, 2011). Solutions Matrix defines DCF as a “cash flow summary adjusted so as to reflect the time value of money (The Meaning of Discounted Cash Flow, 2014).” The valuation of money paid or received in the future has less monetary value if that same money was to be received or paid today (The Meaning of Discounted Cash Flow, 2014).
This does not necessarily depend on externalities but by increasing the liquidity of firm investment, reducing productivity risk, and improving firm efficiency, stock markets encourage firm investment. This stimulates human capital production and growth. Holmstrom and Tirole (1993) emphasize that a firm's ownership structure influences the value of market monitoring through its effect on market liquidity. Considering an agent holds some fraction of the firm as a long-term investment. If he decides to decrease his ownership, there will be more shares actively traded and the liquidity of the market will go up.
The firm-foundation theory from book “A Random Walk Down Wall Street” argues about each investment instrument including common stocks and pieces of real estate. These two instruments have a firm anchor of something called “intrinsic value,” which is determined by careful analysis of present conditions and future prospects. When the market prices fall below the firm-foundation of intrinsic value, a buying opportunity arises. This opportunity arises because the fluctuation will eventually be corrected. Thus investing becomes a full but straightforward matter of comparing something’s actual price with its firm foundation of value.
According to fundamental financial theory, dividends should be paid out when excess cash exists after the firm has invested in all available projects. However, this does not always happen, and furthermore than that, the concept of dividends is routinely used as either a way of showing financial stability to or getting in the good graces of stockholders. Advantages • Can be used as a tool in solving agency problems that exist between management and shareholders • Often signals a strength in profitability • Gives the firm a choice between buying more stock, paying dividends, or investing in either a short-term or long-term project • More dividends usually increases a firm’s stock price due to increased demand Disadvantages • Depending on the firm, paying out dividends can inhibit growth if it significantly hampers the funding of investment projects • The fact that paying out dividends does not have an direct impact on the firm’s value can be seen as a disadvantage • The tax rate for corporations is higher on dividends paid than capital gains earned • As mentioned in the advantages, because the use of dividends can positively stock price, when a firm stops paying them out it can have a negative effect on stock price The most immediate concerns facing the FPL Group in May 1994 result from recent industry deregulation which is causing increased competition. Because of these recent changes enabling the implementation of wholesale wheeling, FPL Group needs to be confronting the issue of ensuring that they are able to handle competition from both in-state and out-of-state providers. Other immediate decisions that need attention from management come in the form of dividend policy.
The main use of stock valuation is to predict future market prices and profit from price changes. The strongest stock valuation method, the discounted cash flow (DCF) method of income valuation, demands discounting the profits (dividends, earnings, or cash flows) the stock will bring to stockholders in the anticipated future, and computing a final value on disposal. There are plenty of different techniques to value stocks. The major part is to capture each approach into account while articulating a general opinion of the stock. If the valuation of the firm were lower or higher than other similar stocks, following the next step would be to decide the rationality for the discrepancy.
The different business transactions that you ecounter determine what kind of interest rate that you are looking for. If you are a person needing a loan than the smaller interest rate that you can recieve the better. If you are looking for a return on money then you are wanting a larger interest rate. Your interest rate for either venture will be determined by several factors and the associated risk. The Determinants The market interest rate is the quoted, or nominal, rate of interest on a given security.
Purchasing of a product or an item with an aim of profit generation via the purchased item can be viewed as investing and the item, an investment. Before purchase, an estimate of the potential market value of a financial asset or liability has to be determined, that is, analyzing the investment. The analysis has to take into consideration various issues such as the overall state of the economy, interest rates, competitive advantage and many others. The analysis can be technically or fundamentally carried out but financial forecast has to be considered (Tutor 2 U, 2011). Since investments’ main aim is profit maximization, cost, output and returns are factors of value.