Stocks Valuation
1) Rights and advantages belonging to shareholders
Shareholders of a company enjoy following rights and advantages
- Ownership right: Shareholders being owners of the company enjoy the right to share residual profits left after paying preference dividend. Their rate of dividend is not fixed. It depends upon the amount of profits. Sometimes they get high dividend in case of high profits.
- Control over management: Shareholders can exercise their control over management through the election of their representatives in the board of directors.
- The voting right: Shareholders have the right to attend annual general meetings of the company and cast their vote in person or through proxy on various resolutions passed in such meetings. This enables them to participate in corporate and managerial affairs without having to regularly manage affairs directly.
- Pre-emptive right: At the time of further issue of shares, an offer is made to shareholders first. If shares are left, they are offered to outsiders. It enables them to maintain their proportionate shareholding intact in the company ( H.Sherman, 2011).
- Transfer of the ownership: Shareholders enjoy the right to transfer the ownership of their securities to others by trading their stock on the stock exchange.
- Control over management: Shareholders can exercise their control over management through the election of their representatives in the board of directors.
2) (a)Differences between the S&P 500 Index and the Dow Jones Industrial Average
Both Dow Jones Industrial Average (DJIA) and the S&P 500 are the best known index of American stocks but differentiate from each other in the following manner.
| Criterion | Dow Jones Industrial Average | S&P 500 |
| Introduction | It is an oldest stock market index which was introduced in 1896 by Charles Dow (Johnson, 2015). | S&P 500 was introduced by S&P Global in 1923 and in its current form, it was published in 1957 ( S&P Dow Jones Indices LLC, 2016). |
| Index Constituents | DJIA is composed of thirty publicly traded American companies listed in NYSE and NASDAQ. These stocks are picked by an editor of The Wall Street Journal. It covers a large range of industries in the US except transport and utilities ( S&P Dow Jones Indices LLC, 2016). | It is based on market capitalization of 500 large companies listed in NYSE and NASDAQ. It covers a wide range of industries. |
| Weighting Method | It is a price-weighted index which is calculated by taking the aggregate of prices of stocks in an index and divided by a common divisor (Johnson, 2015). The stocks having high prices have more weightage in this index. | It is a free float capitalization weighted index where in components are weighted on the basis of their market capitalization ( S&P Dow Jones Indices LLC, 2016). The stocks with higher market capitalization have more weightage in this index. |
(b)Better measure of stock market performance
The S&P 500 is considered to be the better measure of stock market performance than DJIA because it covers approximately 80% of the stock market capitalization and is considered as a true representative of happenings in the US stock market ( S&P Dow Jones Indices LLC, 2016). DJIA covers 30 securities only and its popularity is because of being an oldest index.
3) Differences between common stock and preferred stock
The main two types of stock issued by companies are common stock and preferred stock which have some similarities as well as dissimilarities. The main dissimilarities between both are given as below:
| Criterion | Preferred Stock | Common Stock |
| Meaning | Preferred stock is a hybrid security which combines features of common stocks as well as debt securities (H.Sherman, 2011). The preference dividend is paid at a fixed rate just like payment of interest at fixed rate, but it is paid out of post-tax profits. It is not termed as ownership security. | Common stock is termed as ownership security. Its rate of dividend is not fixed. It depends upon the amount of profits. The amount of dividend may be high in case of high profits and it may be low or even nil in case of low or no profits. |
| Preferences | Preferred stock carries two preferences over common stock which are (i) Preferred stockholders are paid dividend first before the dividend is declared for common stockholders. (ii) At the time of liquidation of company, preferred stock is redeemed first before any amount is paid to common stockholders (Weaver & Weston, 2001). | Common stock holders are paid their periodic dividend as well as redemption value after satisfying claims of preferred stockholders |
| Rights | Preferred stocks do not carry any voting right. But holders get entitled to vote when (i) The dividend has remained unpaid for a specified number of years (H.Sherman, 2011). (ii) The resolution to be passed at the meeting has any impact on their interest. | Common stock provides many rights to stock holders which includes voting rights on corporate and managerial issues and preemptive right. Pre-emptive right is the right given to stockholders to maintain their proportionate ownership in the company at the time of further issue of share (Broadridge Advisor Solutions, 2017). |
References
Broadridge Advisor Solutions. (2017). Financial Services of America. Retrieved from http://www.fsa1.com: http://www.fsa1.com/Common-Stock-vs–Preferred-Stock.c1019.htm
H.Sherman, E. (2011). The Equity in the Business. In E. H.Sherman, Finance and accounting for nonfinancial managers (pp. 204-205). New York: NY: American Management Association.
Johnson, M. (2015). What’s the difference between DJAI and S&P 500. Retrieved from http://www.nasdaq.com: http://www.nasdaq.com/article/whats-the-difference-between-the-dow-jones-and-the-sp-5001-cm548598
S&P Dow Jones Indices LLC. (2016). S&P Dow Jones Indices. Retrieved from us.spindices.com: http://us.spindices.com/indices/equity/sp-500
Weaver, S., & Weston, J. F. (2001). Financial Statements and Cash flows. In S. Weaver, & J. F. Weston, Finance and Accounting for Non-financial Managers (pp. 26-28). New York: NY: Mc Graw Hill.
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