{"id":415,"date":"2018-11-28T19:54:01","date_gmt":"2018-11-28T19:54:01","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/suny-personalfinance\/?post_type=chapter&p=415"},"modified":"2018-11-28T19:56:08","modified_gmt":"2018-11-28T19:56:08","slug":"15-2-stock-value","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-personalfinance\/chapter\/15-2-stock-value\/","title":{"raw":"15.2 Stock Value","rendered":"15.2 Stock Value"},"content":{"raw":"
\r\n

Learning Objectives<\/h3>\r\n
\r\n
\r\n
\r\n
    \r\n \t
  1. Explain the basis of stock value.<\/li>\r\n \t
  2. Identify the factors that affect earnings expectations.<\/li>\r\n \t
  3. Analyze how market capitalization affects stock value.<\/li>\r\n \t
  4. Discuss how market popularity or perception of value affects stock value.<\/li>\r\n \t
  5. Explain how stocks can be characterized by their expected performance relative to the market.<\/li>\r\n<\/ol>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n
    \r\n
    \r\n

    The value of a stock is in its ability to create a return, to create income or a gain in value for the investor. With common stock, the income is in the form of a dividend, which the company is not obligated to pay. The potential gain is determined by estimations of the future value of the stock.<\/p>\r\n

    If you knew that the future value would likely be more than the current market price\u2014over your transaction costs, tax consequences, and opportunity cost\u2014then you would buy the stock.<\/p>\r\n

    If you thought the future value would be less, you would short the stock (borrow it to sell with the intent of buying it back when its price falls), or you would just look for another investment.<\/p>\r\n

    Every investor wants to know what a stock will be worth, which is why so many stock analysts spend so much time estimating future value. Equity analysis is the process of gathering as much information as possible and making the most educated guesses.<\/p>\r\n

    Corporations exist to make profit for the owners. The better a corporation is at doing that, the more valuable it is, and the more valuable are its shares. A company also needs to increase earnings, or grow, because the global economy is competitive. A corporation\u2019s future value depends on its ability to create and grow earnings.<\/p>\r\n

    That ability depends on many factors. Some factors are company-specific, some are specific to the industry or sector, and some are macroeconomic forces. Chapter 12 \"Investing\"<\/a> discussed these factors in terms of the risk that a stock creates for the investor. The risk is that the company will not be able to earn the expected profit.<\/p>\r\n

    A company\u2019s size is an indicator of its earnings and growth potential. Size may correlate with age. A large company typically is more mature than a smaller one, for example. A larger company may have achieved economies of scale or may have gotten large by eliminating competitors or dominating its market. Size in itself is not an indicator of success, but similarly sized companies tend to have similar earnings growth.E. F. Fama and K. R. French, \u201cThe Cross-section of Expected Stock Returns,\u201d Journal of Finance<\/em> 47 (1992): 427\u201386.<\/span><\/p>\r\n

    Companies are usually referred to by the size of their market capitalization or market cap, that is, the current market value of the debt and equity they use to finance their assets. Common market cap categories are the sizes micro, small, mid (medium), and large, or<\/p>\r\n\r\n