Common stock has several issue characteristics. The first is that it represents ownership in a company. The second characteristic is that it has voting rights for the holders. Thirdly, this stock has volatility for its holders. Another characteristic is that the holders of these shares have the right for receiving dividends as determined by the management board of the company. This stock has a number of advantages. The first is that it has the potential to deliver high gains as due to dividends and capital gains. The other advantage is that the potential loss from an investment in stocks is limited to the initial outlay. This contrasts to leveraged investments whereby financial losses may exceed the initial investment.
Disadvantages of common stock holding are based on several reasons. The first is that these stocks are the last to get paid since they are the actual owners. In addition, these shareholders may be limited to accessing the company information since they only do so at AGMs. Finally, these investors may be frustrated by drops in stock prices. An example of this situation is the common shareholders of Apple Inc. They have witnessed an increase in value of their investments owing to the success of the company. However, if it is not sustained, the investors will lose funds.
Dividends are important in stock valuation since they are applied in estimating the value of a company. In the dividend discount model, for example, the dividends and their growth rates are applied to determine the future worth of companies. The other importance is based on the fact that they signal the performance of the company hence they are critical indicators in stock valuation. Dividend decisions are made by considering the dividend policy of the company. If the policy allows for free cash flow dividend payment, then any free cash flows will be paid as dividends. The types of dividends include a cash dividend, stock dividend and rights issues. Dividend policies include the residual dividend policy, constant payout ratio, constant growth dividend policy and comprise dividend policy. An example is the constant payout ratio that is used by P&G.
Use of common stocks as investments can help in meeting investment goals. This is because these investors can obtain returns in terms of capital gains and also dividends. Strategies can also be applied in meeting the investment goals. In such a case, investors can apply the diversification as a major strategy. They should diversify across market segments, industries and geographical regions. With the diversification, investors can obtain high returns and also reduce the risks of their investments substantially.
The security analysis process deals with the identification of the top potential investments in securities for investors. It starts with the identification of potential firms and their relative strengths. After this step, firms with a high potential are selected. These are deeply evaluated to determine their worth. Its goals are the identification of the best investment companies and maximization of returns. It plays the function of guiding investors towards investment success by ensuring that their investment goals are met. An example is that of Wall Street Analysts who provide investment guidance by rating listed companies.
The accounting statements for evaluating the historical performance include the balance sheet, income statement and the cash flow statement. The financial ratios applied in such for valuation include the P/E ratio, P/BV ratio and EPS. They are useful in indicating the true values of the company to investors.