Essay on Value and Growth of Stocks

2021-05-31 02:55:14
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University of California, Santa Barbara
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Essay
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The property of any business is financed through borrowed money or the money that is owned by the companys shareholders. Borrowed money is known as liabilities, and there are two main types of obligations namely: short term liabilities and long term liabilities. On the other hand, money owned by the business owner or the companys shareholders is known as equity. Therefore, assets are a sum of total liabilities and total shareholders equity. If the company assumes a corporate form, investors are invited to be part of the firm by contributing share capital; which is simply, the money that the corporate raises in exchange for granting part of the ownership to the shareholders. Upon the acquisition of the shares, investors are classified as the business owners, and the funds accumulated from this transaction are recorded in financial statements under equity rather than liabilities. In brief, a stock is a security that investors buy to signify ownership in a company by way of representing a claim on a share of the assets and earnings of the same. Meanwhile, to the company, it is a way of increasing its equity for purposes such as business expansion among others. This paper is going to explore the value and growth of stocks.

Stocks are categorized into two main categories namely: common stock and preferred stock. The main difference comes in voting rights. Whereas common shares carry with them the right to vote, preference stocks do not. However, there are other benefits and advantages that preference stocks hold over common stocks that may not be so obvious. Preference stockholders are superior in that shareholders of such tend to have greater claims and security in a companys assets and profits. For this reason, the value per share of preference stocks is slightly higher than common stocks. Priority is also given to preferred stockholders when it comes to sharing of dividends. In the event the company registers excess cash in the name of profits, the money is first distributed to the preferred shareholders. The same applies in the case of insolvency and liquidation. Common stockholders of any company come last in line in liquidation of the corporations assets. This means that, in the event of bankruptcy, a company has to liquidate all its assets and pay off the creditors, bondholders, preferred stockholders and common stockholders in that order (O'Neil, 2009).

The value of preferred shares thus is higher than common stocks. For instance, an investor who buys preference shares of company X will have an idea when to expect dividends, and they can accurately predict many bonuses to be paid. Preference shares come with a timeline, and their dividends are payable at regular periods. Nevertheless, this is not necessarily the case with common stocks. Where profits registered are small, the board of directors can decide whether or not to pay out dividends to the common stockholder. The terms of common stocks are shaky, and no clear pattern can be deduced from the same concerning dividend payment. From this explanation, it is evident why the value of preferred stocks supersedes that of ordinary shares. Where a company needs a lot of money to run a business, they offer more preference shares as opposed to common shares. Preference shares give their shareholders certain rights ahead of common shareholders (Damodaran, 2011).

On the other hand, the common shareholder has one significant advantage over the preference shareholders, voting rights. An ordinary shareholder is entitled to participate in making decisions that directly affect the company. The value of common stocks is not only financial but also administration. A less desirable aspect of preference shares is that their position is that of the figurehead and have no say in important matters affecting the company. For instance, the value of preference stocks does not include voting at companys shareholder meetings. Thus, issues like electing the board of directors and merger proposals are above them.

Another category of stocks is the growth stock. A growth stock is a share whose growth rate is above average. Usually such stocks do not pay up dividends, and instead, they are preferably reinvested to steer the company through major capital projects. A person investing in growth stocks targets potential capital gains as opposed to dividends income. Growth stocks are dangerous kind of investment because the company may take a while before registering significant capital gains. Enterprises that do not have an absolute success rate are not advisable for growth stocks ("Growth Stock", 2017). In the process such companies fail to grow, their shareholders risk losing money because of shaky market confidence and a drop in share prices. The best businesses to invest in growth stocks are ones with advanced and unique product lines. Competition is kept in check by such companies, and their growth is sure. The company also should exhibit regional monopoly, and its products demands are at an all-time high. The difference between a value stock and a growth stock is the potential earnings and profitability.

References

Damodaran, A. (2011). The little book of valuation. Hoboken, N.J.: John Wiley & Sons.

Growth Stock. (2017). Investopedia. Retrieved 27 January 2017, from http://www.investopedia.com/terms/g/growthstock.aspO'Neil, W. (2009). How to make money in stocks. New York: McGraw-Hill.

 

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