I need to write about this question: Discuss the various stockholder rights. What factor(s) make the valuation of common stock more complicated than the valuation of bonds/preferred stocks?
(im so confused!!) :(
Here's a great article about stock holders' rights.
http://www.investopedia.com/articles/01/050201.asp
The price of common stock varies from hour to hour (minute to minute). Preferred stock and bond prices are steady.
In the end, looking far ahead, the value of a share of a company is the present value of a future stream of dividends. Of course people do not think much about that for most stocks, particularly those that presently pay no dividends, because there are so many other factors more immediate such as are they about to buy another company or be sold themselves or do they have a neat new product coming to market that will attract new investors and drive the price up. The company directors and managers are ultimately responsible to the owners, the stockholders though, and somewhere they should be keeping that eventual money making and distribution of profits to stockholders in mind.
The worth of bods or preferred stock is as you can see from the above much simpler. They have a dividend or interest payment now and until maturity or whatever and we can see what the present value of that is easily. The value of that only depends on two things. One: will the company fail and stop paying in bankruptcy? Or two: will interest rates in general go up and make those payments less valuable. However those drawbacks apply even more so to the common stock so the bond route is more predictable and easily valued.
Don't worry, I'm here to help you understand and hopefully make things less confusing!
To discuss the various stockholder rights, you'll need to understand what rights are typically associated with common stock ownership. Stockholder rights can vary depending on the company and its bylaws, but here are some common rights:
1. Voting rights: Common stockholders usually have the right to vote on key decisions, such as electing the board of directors or approving major company changes.
2. Dividend rights: Common stockholders may be entitled to receive dividend payments, which are a portion of the company's profits distributed to shareholders. However, dividend payments are not guaranteed and can be discretionary.
3. Information rights: Stockholders have the right to access certain financial information about the company, including annual reports, financial statements, and other relevant disclosures.
4. Preemptive rights: Some companies may grant common stockholders the right to purchase additional shares of stock before they are offered to others, allowing them to maintain their ownership percentage.
Now, let's move on to the second part of your question. Why is the valuation of common stock more complicated than the valuation of bonds or preferred stocks?
The valuation of common stock can be more difficult due to several factors:
1. Uncertainty of future cash flows: Unlike bonds, which have fixed interest payments, the future cash flows from common stock are uncertain. The value of common stock depends on the company's profitability, growth potential, and overall market conditions.
2. Volatility and market sentiment: Common stock prices can be influenced by various external factors, such as market trends, investor sentiment, and overall economic conditions. This volatility makes it harder to accurately predict stock prices compared to the relatively stable nature of bond prices.
3. Subordination in the event of bankruptcy: In case of bankruptcy or liquidation, bondholders and preferred stockholders have higher priority in receiving payments compared to common stockholders. This subordination affects the risk-return profile of common stock and, consequently, its valuation.
4. Less predictable income stream: Bonds and preferred stocks generally have fixed interest or dividend payments, making their income stream relatively more predictable. However, common stock dividends are not guaranteed, making it harder to estimate the future income stream associated with common stock ownership.
To summarize, the valuation of common stock is more complicated because it is influenced by uncertain future cash flows, market volatility, subordination in bankruptcy, and less predictable income streams compared to bonds or preferred stocks.