How Markets and Investors Value a Stock

Learning Team Reflection week4: How Markets and Investors Value a Stock
Name
Institution
Discuss how markets and investors value a stock
The concept video on stock valuation advices on how business persons can invest in capital markets, for instance, investing in stocks and bonds. The speaker provides insights on the structure of each investment opportunity citing the advantages and disadvantages associated with investment in both stocks and bonds. Further, the speaker explains the process and importance of listing a company in the stock market, pinpointing the regulating requirements that tend to influence how an organization can raise capital through stock market.
According to the speaker, corporations commonly issue two types of stock that include common stocks and preferred stocks. The two differ on their preferences on liquidation. Preferred stocks are normally paid fast while common stocks are paid after all the company’s debt have been paid. Different methods are used to value such stocks and these include net present value approach and the dividend discount model. Net present value is a method of stock valuation in which investors tend to look at the expected value of cash flows of a particular stock over time in relation to the original price of the stock.
Dividend discount model is an approach that values stock by discounting back the stream of dividend expected over time. The model is helpful in determining whether the dividends of a certain stock are set or would strategically grow in the future. The expected value of the dividend is discounted to the present value of the stock. The model is also helpful in determining the terminal value of the stock, which is the expected value the stock should be sold for, at the end of a certain period. Sometimes, markets play a major role in influencing stock valuation. For instance, indices may create a perception of the market, for instance, the level of risks expected in the market, which may affects a stock valuation (Brigham & Houston, 2012). Stock valuation is necessary as it p...