Types of stocks:
There are two types of stocks. They are:
- Common Stock
- Preferred stock.
Common Stock is an investment security that represents the ownership of a company. For example, To a very close person, you say that he owns stock of a particular company then that stock is called common stock in types of stocks. At the same time. If the person owns some amount of shares in that company, he will be a part-owner of that corporation. By owning part of the company, you need to share both profit and loss. The benefit of being a part-owner of the company is that they will pay you dividends by the company. If the sales and profits of a company increase, there will be an increase in your dividend and stock price that leads to an increase in your investment performance. common stock is a Stock.
Where Total Return = Income received from investment + Any change in its value
Sometimes the profits differ from a few cents to several dollars reflecting investors’ demand and state of the markets. They classify most of the stock as a voting stock which allows the stockholders to vote for the board of directors, and they can also vote for various shareholder’s proposals.
Features of Common Stocks
- The right to receive dividend payments typically from earnings. If allowed by the board of directors.
- The power to sell the stock (liquidity rights) and realize capital gains on public trading markets or in private transactions. If there are willing buyers.
- The right to receive consideration in a merger or other fundamental transaction. If approved by the board and the shareholders.
- The right to vote to elect directors and to approve fundamental transactions (mergers, sale of assets, amendments to articles, dissolutions).
- The right to receive a proportionate distribution of assets on corporate liquidation. If the board and shareholders approve a dissolution.
Advantages of Common Stock
- Common stock has the potential for delivering very large gains, unlike a bond, certificate of deposit, or some other alternatives.
- It limits the potential loss from stock purchased with cash to the total initial investment.
- Stocks offer limited legal liability.
- Most stocks are very liquid they can be bought and sold quickly at a fair price.
- Although past performance is not a guarantee of future performance, stocks have historically offered very high returns about other investments.
- Stocks offer two ways for their owners to benefit by capital gains and with dividends.
Disadvantages of Common Stock
- Since common stock represents ownership of a business, stockholders are the last to get paid, like all other owners.
- While shareholders are company owners, they do not enjoy all the rights and privileges that the owners of privately held companies do.
- Investors in a company may not know all that there is to know about the company.
- Stock costs are volatile. Costs are often rising and declining quickly. Such declines usually cause investors to panic and sell, which only serves to lock in their losses.
Calculating Common Stock:
1. Calculating the number of shares of outstanding
The number of shares of common stock outstanding is a metric that tells us how many shares of a company are currently owned by investors. We can often find this in a company’s financial statements but is not always readily available. Rather, you may see terms like “issued shares” and “treasury shares” instead. Besides, it’s helpful to understand where the numbers you’re looking at came from.
Then here, (Number of Outstanding Shares = Number of Issued Shares—Treasury Stocks).
The shares that are currently available to be bought and sold by the public.
Shares that cannot be bought or sold without permission from the SEC held by company insiders or institutional investors.
The total number of shares a company has ever issued. This includes shares that were made available to be bought and sold by the public, and shares bought by or issued to company insiders and institutional investors.
The total number of shares available to be bought and sold, and shares held by institutions and insiders.
The total number of shares a company could issue.
It shares that a company has bought back and is held in the company’s treasury.
A special stock that pays a fixed dividend, much like a bond.
Let us take an example of a company ‘A’ to find out how to calculate the number of outstanding shares of the company. Now we will also try to understand what authorized shares, issued shares, and treasury stocks mean.
Suppose the number of authorized shares for a Company 10,000 shares.
Suppose the treasury stock portion is 1000 shares. Authorized share is the maximum number of shares a common can issue which is mandated during the public offering of a company.
The snapshot below represents all the data required for common stock formula calculation.
Authorized Shared 10000
Shares Issued 4000
Treasury Shares 1000
The calculation of outstanding shares will be as follows,
Number of Outstanding shares = Number of issued shares – Treasury stocks
Number of Outstanding shares = 4000 – 1000 = 3000
Therefore, the number of outstanding shares will be =3000.
2. Calculating the common stock price using the dividend growth model
We base the common stock valuation formula used by this stock valuation calculator on the dividend growth model, which is just one of several stock valuation models used by investors to determine how much they should pay for various stocks.
The dividend growth model for common stock valuation assumes that dividends will be paid, and also assumes that dividends will grow at a constant pace for an indefinite period.
1. To determine the value of common stock using the dividend growth model, you first determine the future divided by multiplying the current dividend by the decimal equivalent of the growth percentage.
Then here, (divided x (1 + growth rate)).
2. Lastly, the future dividend is divided by the difference between the decimal equivalent of the expected rate of return and the decimal equivalent of the growth percentage.
Then here, (future dividend ÷ (expected rate of return – growth rate)).
To illustrate how to calculate stock value using the dividend growth model formula, if a stock had a current dividend price of $0.48 and a growth rate of 1.200%, and your required rate of return was 6.200%, the following calculation shows the most you would want to pay for this stock would be $8.51 per share.
Stock Price Calculation Using Dividend Growth Model
Variable Formula Result
Future dividend = Dividend x (1+(growth rate / 100)) Future dividend = 0.48 x (1 + (1.2 / 100)) Future dividend = 0.48 x (1 + (0.012)) Future dividend = 0.48 x 1.012 0.48
Rate difference = Required rate - Growth rate Rate difference = 0.062 - 0.012 0.05
Stock price = Future dividend / Rate difference Stock price = 0.48 / 0.05 $9.6
Preferred stock gives investors some level of ownership in a company, but preferred shareholders do not have voting rights. This may vary depending on company policies. However, preferred stocks are usually guaranteed dividend payments, and they always pay their dividends out before dividends on common stock. The price of preferred stock doesn’t change as much as the price of the common stock in types of stocks. It means that the preferred stock doesn’t lose much value even during a downturn in the stock market. So, preferred stock may be attractive if you’re looking for capital gains, owning preferred stock may limit your potential profit.
For example, when loaning money to a friend, you expect to be paid back with interest. Preferred stock works in a very similar fashion. They may issue it at $20 per share and may trade on the stock market. So, Hopefully, has the preferred stockholders have increased in dividends and share price growth, instead of sharing profits preferred stock owners receive the fixed dividend payments.
Features of Preferred Stock
- Preference in assets upon liquidation.
- The shares provide dividend payments to shareholders.
- Preferred shareholders have a priority in dividend payments over the holders of the common stock is a type of stock.
- The shares do not assign voting rights to their holders. However, some preferred shares allow its holders to vote on special events.
- Convertibility to common stock and call ability. These are the features of preferred stock types.
Advantages of Preferred Stock
- This type of financing allows issuers to avoid or defer the dilution of control, as the shares do not provide voting rights or limit these rights.
- The shares do not force issuers to pay dividends to shareholders. So there is no obligation for dividends.
- The company’s management enjoys the flexibility to set up almost any terms for preferred shares.
- Secured a position in case of the company’s liquidation.
- Most preferred shares provide their shareholders with a fixed income in the form of dividend payments.
Disadvantages of Preferred Stock
- As a general rule, preferred stockholders do not have the voting right. Therefore, they have no control over the management of the company to protect their interests.
- Although preferred stockholders bear a substantial portion of ownership risk, they get a limited return.
- The preferred stockholders have no legally enforceable right to dividends.
- The fluctuation in the price of preferred stock is wider than that of bonds. It exposes investors to higher price risk.
Calculating Preferred Stock
Calculating the cost of preferred stock
The cost of preferred stock to the company is effectively the price it pays in return for the income it gets from issuing and selling the stocks. It’s the amount of money the company pays out in a year divided by the lump sum they got from issuing the stock from the stock market.
TCS & company has 3,752,384,706 shares 103.10 per value non-cumulative series L preferred stock.
They carry an annual fixed coupon rate of 1.78%. The preferred stock has a current market price on 29 December 2019 July 2165.10. Find the cost of preferred stock.
Annual dividend payment = 1.78% of 2165.10 =38.538
Cost of preferred stock = annual dividend payment (38.538) / current market price (2165.10) =1.75%. These are types of stocks.
Classification of stock
We can classify stocks into multiple categories on various parameters, including the size of the company, dividend payment, industry, risk, volatility, and fundamentals.
1. Stocks based on ownership rules
This is the most basic parameter for classifying stocks. These may be hybrid stocks, stocks with embedded-derivative options.
a. Hybrid stocks
These are also known as preferred shares that can be converted into a fixed number of common stocks at a specific time. They are also called convertible preferred shares. Some companies issue these hybrid stocks. As these are hybrid stocks, they may or may not have voting rights like common stocks.
b. Stocks with embedded-derivative options
These kinds of stocks are not commonly available and come with an embedded derivative option that means these types of stocks can be a callable stock or putable stock.
A ‘callable stock‘ is one that has the option to be bought back by the company at a certain price or time.
A ‘putable stock‘ gives the stockholder the option to sell it to the company at a prescribed time or price.
2. IT-based on market capitalization
a. Small-cap stocks
As the name suggests, ‘cap’ is the smallest form of capitalization and these stocks have the smallest value in the market that mostly represents small size companies. The companies that maintain the market capitalization up to 250 crores are called small-cap stocks.
These types of stocks are handy for the investors who are looking forward to significant gains in the long run as long he does not require current dividends and can withstand price volatility. This is possible because small companies can explode, and, the investor can gain profits by buying those stocks when they are cheaply available in the initial stage when the company was started. But, as most of these companies are new to the market, it is very difficult to predict how they will perform in the market.
b. Mid-cap stocks
The stocks of a medium-sized company are called mid-cap stocks. The stocks of these companies have a market capitalization between Rs. 250 crores to R’s 4,000 crores are called mid-cap stocks. These are stocks of well-known companies that are recognized in the market. These offer the advantage of gaining stocks with good growth potential and the stability of a larger company.
Mid-cap stocks also include baby blue-chip companies that show steady growth backed by a good track record. They are like blue-chip stocks (which are large-cap stocks) but lack their size. These stocks tend to grow well over the long term.
c. Large-cap stocks
This represents the stocks of the largest companies in the market such as Tata, Reliance, and ICICI are classified as large-cap stocks. And these are often blue-chip firms. Being established enterprises, they have at their disposal large reserves of cash to exploit new business opportunities. However, the size of large-cap stocks does not let them grow as rapidly as smaller capitalized companies, and the smaller stocks tend to outperform them over time.
The best advantage for investors is that they get higher dividends repeatedly compared to small and mid-cap stocks and also ensure the long-term preservation of their capital.
3. IT-based dividend payments
a. Income stocks
These are stocks that distribute a better dividend in relevancy to their share value. They are additionally referred to as dividend-yield. So, a better dividend means that larger financial gain. This is often why these stocks are referred to as financial gain stocks.
Income stocks sometimes represent stable corporations that distribute consistent dividends. However, these corporations rarely seem to be high-growth corporations. As a result, the stock’s worth might not rise abundantly. Most well-liked stocks also are financial gain stocks, since they promise regular dividend payments.
As these are low-risk stocks, most of the people who are looking for another source for income will keep their investments in income stocks. And it will not tax the people who keep their investments for their dividend income.
b. Growth stocks
Not all stocks pay high dividends. This is often As a result, firms favor to reinvest their earnings for company operations. This sometimes helps the corporate grow at a quicker rate. As a result, we usually refer to such stocks as growth stocks.
Since the corporate grow at a quicker rate, the worth of the shares conjointly rises. This helps the capitalist earn a better return once the stock is sold-out, though this comes at the expense of lower financial gain through dividends.
Investors select such stocks for his or her long-run growth potential and not for a secondary supply of financial gain. However, if the corporate ceases to grow, it can’t be referred to as stock. This makes such stocks a lot riskier than financial gain stocks.
4. Stocks based on fundamentals
Most people believe that price investment means a share value should equal the intrinsic price of the company’s share. They compare recent share costs with per-share earnings, profits and alternative financial to attain the intrinsic worth per share.
Here, if the price is lower than the intrinsic value, we consider the stock as undervalued. At the same time. If the share price exceeds this intrinsic value, we believe the stock as overvalued.
It also refers to undervalued stocks as ‘value stocks’. They’re most popular by price investors, as they believe the share value can eventually rise within the future.
5. Stocks based on risk
In these types of stocks, some stocks are riskier than others. This is often because their share costs fluctuate additionally. However, because a stock is risky doesn’t mean investors ought to avoid it. Risky stocks have the potential to form you bigger profits. Low-risk stocks, in distinction, offer you lower returns.
a. Blue-chip stocks
These areas unit stocks are well-established corporations with stable earnings. These corporations have lower liabilities like debt. This helps businesses pay regular dividends. Blue-chip stocks are therefore considered safe and stable. They’re named once blue-colored chips within the game of poker they consider because of the chips are foremost valuable.
b. Beta stocks
Analysts live risk referred to as beta by calculative the volatility in its value. Beta values will have a positive or negative value. The sign just denotes if the stock will probably move in the set with the market or against the market. What extremely matter is the definite quantity of beta. Higher the beta, the larger the volatility and therefore a lot of the risk. A beta price over one suggests that the stock is additional (volatile) than the market. Thus, high beta stocks are riskier. However, a wise capitalist will use this to form larger profits.
6. Stocks based on price trends
In these types of stock’s price of stocks typically moves in a cycle with company earnings. Stocks are, therefore, classified into two types.
a. Cyclical stocks
Some firms are additionally suffering from economic trends. Their growth moderates during a slow economy, or fastens in an exceedingly booming economy. As a result, the costs of such stocks fluctuate additional as economic conditions modification. They rise throughout economic booms and fall because the economy slows down. Stocks of automobile firms are the most effective example of cyclic stocks.
b. Defensive stocks
Unlike cyclic stocks, defensive stocks are issued by corporations comparatively unmoved by economic conditions. The best examples are stocks of corporations within the food, beverages, medication, and insurance sectors. Such stocks are most popular once economic conditions are poor, whereas cyclic stocks are most well-liked once the economy is booming. These are types of stock.
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