What Is The Value Of Common Stock Dependent On ?
Common stock refers to the shares of a company that a stockholder or investor buys. Usually common stock holders can make money on their stock in two ways. One is by getting dividends from the company, and the other is selling the stock in the market based on the market value. |
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Dividends are paid to stockholders based on the company's earnings and cash flow. While selling a stock is only profitable if the value of the stock has gone up. This brings us to value of common stock and what it is dependent on.
There are different methods to figure out the value of common stock. One way of determining the value of common stock is taking into consideration the present value of future dividends. The formula to get to the present value of a stock is to take future dividends per share and divide that amount with required rate of return.
Another way to determine the value of common stock is to look as the free cash flow of the company. This is the money that company generates through business operations minus the capital expenditures it has. In other words, free cash flow refers to the money that the company has after it has paid all its bills. Here the free cash flow per share is divided by the required rate of return to get the value of per share.
Similarly, there are many other methods to get value of common stock. Some methods are easy and simple, while others are more complex.
It is also necessary for investors to note that value of common stock is dependent on various factors, and all these factors cannot be controlled by the investor. It depends on how the company is run, the operations are conducted, what the administration is doing to decrease overheads and increase bottom line, what plans are there to expand the business and what expenses are required for the expansion. All these factors determine the value of the common stock and are beyond the control of the investor.
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