stocks presentation

Stocks Overview

  • Definition of Stocks: An investment representing ownership in a company, granting the stockholder a share of the company's profits.

  • Types of Investments: Stocks represent one of three main investment types, alongside bonds (investing by lending money) and options (investing based on other investments).

Stock Basics

Core Principles in Finance

  • Time Value of Money: The principle that money available today is worth more than the same amount in the future due to its potential earning capacity.

  • Valuation and Investing: Understanding how to assess good investments based on intrinsic value.

  • Risk and Return: Assessment of how to combine investments to manage risk while maximizing returns.

Types of Investments

  1. Bonds: Investing by lending money to someone else.

  2. Stocks: Investing by owning part of a business.

  3. Options: Investing based on the value movements of other investments. (Note: Advanced derivatives are beyond the scope of this course.)

Key Stock Terminology

  • Stock:

    • Represents ownership in a company.

    • Entitles holders to a share of profits.

  • Dividend:

    • Payments made to stockholders from company profits.

    • Not required to be paid.

  • Market Capitalization (Market Cap):

    • Total value of a company's outstanding shares of stock.

    • Calculated as: MarketextCap=extMarketPriceimesextNumberofSharesOutstandingMarket ext{ Cap} = ext{Market Price} imes ext{Number of Shares Outstanding}

Stock Ownership Analogy

  • Local Business Ownership (e.g., a local restaurant): Generally owned by 1 or 2 individuals.

  • Publicly Traded Company Ownership (e.g., Google): Owned by millions of shareholders.

  • The act of owning stock is akin to owning a business, differing primarily in ownership size.

Company Financials

Activities of a Company

  • Profit: Revenue generated by the company activities.

  • Assets: Resources owned by the company.

  • Cash: Liquid funds available for operations.

  • Debt: Money owed by the company.

  • Equity: Ownership interest in the company.

Historical Context of Stocks

  • Stocks have evolved from physical certificates to electronic forms.

  • Current stock information can be tracked in real-time online (e.g., via Yahoo Finance).

Stock Valuation

Fundamental Valuation Formula

  • The value of an investment equals the present value of expected future cash flows, discounted at a required rate of return:

    <br>V=racCF<em>1(1+r)1+racCF</em>2(1+r)2+…+racCFn(1+r)n<br><br>V = rac{CF<em>1}{(1 + r)^1} + rac{CF</em>2}{(1 + r)^2} + … + rac{CF_n}{(1 + r)^n}<br>

Cash Flows for Stocks

  • Future cash flows from a stock typically include:

    • Dividends: Regular payments to shareholders.

    • Terminal Value: Estimated value when stock is sold in the future.

Stock Value Relationship

  • The value of a stock is based on the present value of dividends and the price at which the stock is expected to be sold later:

    <br>extStockValue=extPresentValueofDividends+extPresentValueofTerminalValue<br><br>ext{Stock Value} = ext{Present Value of Dividends} + ext{Present Value of Terminal Value}<br>

Comparison to Bonds

Stocks

Bonds

Discount rate required

Yield to maturity

Dividends can grow over time

Coupon payments are constant

Indefinite payments

Fixed terms

Terminal value at sale

Face value at maturity

Discount Rate in Stock Valuation

  • Definition: The discount rate reflects required return, accounting for time and risk.

  • Determined by:

    1. Delay in cash flows.

    2. Uncertainty of cash flow realization.

Growth Rate in Stock Valuation

  • The growth rate estimates the increase in dividends over time:

    • Compounded from past dividends:

    <br>extFutureDividend=extPastDividendimes(1+extGrowthRate)extYearsofGrowth<br><br>ext{Future Dividend} = ext{Past Dividend} imes (1 + ext{Growth Rate})^{ ext{Years of Growth}}<br>