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What does it mean to own a stock? You may know that a stock is an investment and that it can go up or down, but there is more to owning a stock than that. When you own a stock, you own a fraction of the company. If it is just one stock, then it is likely an incredibly small fraction, but institutional investors and even some individuals may accumulate enough stock in a company to own a significant portion of the company. It is important for you, as a shareholder of the company, to understand that you may be entitled to certain privileges, such as voting rights or dividends. Additionally, there are different types of stocks (e.g., common and preferred), and you should understand the difference between them before making an investment decision in a company.
For this Assignment, you will explain the differences between common stock and preferred stock, as well as explain other aspects of common stocks, such as potential total return and valuation. You will describe how dividends affect stocks and their total returns.
Submit your responses to the following prompts.
- What are a few differences between common stock and preferred stock? (75–150 words, or 1–2 paragraphs)
- What makes up the potential total return of a common stock that you purchase? (75–150 words, or 1–2 paragraphs)
- Why are stocks generally more difficult to value than bonds? (75–150 words, or 1–2 paragraphs)
- Why might a company choose to not pay dividends? (75–150 words, or 1–2 paragraphs)
- Under what two assumptions can you use the dividend growth model to determine the value of a share of stock? (150–225 words, or 2–3 paragraphs)
- Based on the dividend growth model, what are the two components of the total return on a share of common stock? Which do you think is typically larger? (75–150 words, or 1–2 paragraphs)