This article presents a bit of finance theory, namely the basis for a stock’s price. A stock’s price is equal to the net present value (NPV) of all expected future dividends. (See the article elsewhere in the FAQ for an explanation of the time value of money and NPV.) A company will plow its earnings
Category: Stocks
Preferred Stock
Preferred stocks combine characteristics of common stocks and bonds. Garden-variety preferred shares are a lot like general obligation bonds/debentures; they are called shares, but carry with them a set dividend, much like the interest on a bond. Preferred shares also do not normally vote, which distinguishes them from the common shares. While today there are
Outstanding Shares
Data that are frequently reported about a stock are the number of shares outstanding and the float. These two bits of information are not the same thing, although they are closely related. In a nutshell, the outstanding shares (also known as issued shares) are those held by the public but possibly restricted from trading, and
Company Merger
When one firm takes another over, or merges with another, a number of things can happen to the firm’s shares. The answer is, it depends. In some cases, the shares of one company are converted to shares of the other company. For instance, 3Com announced in early 1997 that it was going to purchase US
Initial Public Offerings (IPOs)
Introduction to IPOs When a company whose stock is not publicly traded wants to offer that stock to the general public, it usually asks an “underwriter” to help it do this work. The underwriter is almost always an investment banking company, and the underwriter may put together a syndicate of several investment banking companies and
Shareholder Rights
The investor rights movement (sometimes called shareholder rights or shareholder activism) involves people who try to use their shares to make publicly traded companies more accountable to their shareholders. (Please don’t confuse this issue with the topic of the rights of an individual investor with respect to the broker or brokerage firm in case of
Market Volatility Index (VIX)
The Market Volatility Index (VIX) is a measure of implied volatility in trading of S&P 500 futures on The Chicago Board Options Exchange. The index is calculated using a formula that considers a large number of option strike prices, supposedly in a way based on current financial research and practice. Values for VIX tend to
List of Stock Indexes
US Indexes: AMEX Composite A capitalization-weighted index of all stocks trading on the American Stock Exchange. NASDAQ 100 The 100 largest non-financial stocks on the NASDAQ exchange. NASDAQ Composite Midcap index made up of all the OTC stocks that trade on the Nasdaq Market System. 15% of the US market. NYSE Composite A capitalization-weighted index
Dow Jones Industrial Average
The Dow Jones averages are computed by summing the prices of the stocks in the average and then dividing by a constant called the “divisor”. The divisor for the Dow Jones Industrial Average (DJIA) is adjusted periodically to reflect splits in the stocks making up the average. The divisor was originally 30 but has been
Stock Indexes
3 Different Types of Stock Indexes: There are three major classes of indexes in use today in the US: Equally weighted price index – An example is the Dow Jones Industrial Average. Market capitalization weighted index – An example is the S&P500 Industrial Average. Equally weighted returns index – The only one of its kind