Finance Essay Example | Topics and Well Written Essays - 1250 words - 9

Finance - Essay Example Unlike security bonds that have fixed flow of cash, stock is an equity security that guarantees individual shareholders a proportionate ownership in a business. Some of the corporate values that shareholder gets including right to vote and periodic payments from the investment returns called dividends (Ferraro 2009, pg. 10). Like financial assets, the value of the invested stock will be the discounted value of prospective cash flow in the future. Stock fundamental value is reflective of any dividends and the sale price of the stock in the future (Arnold 2007 p.225). One of the cornerstone elements of stock valuation is the Price-to-Earn-Ratio (P/E) it links stock prices changes to the valuation of stock. In the financial market, P/E dictates the prices of stock and the subsequent effect on overall organization stock value. Besides, this ratio shows how long wills a particular stock take to pay back the investor capital if there is stagnation of the business. For instance, a stock trading at $20 with a return of $2 per individual share has a P/E of 10. Essentially, this means that an investor will get the capital invested back (Arnold 2007, p.225). Arnold (2007 p.225) notes that the stock pricing is a cornerstone in valuation of stock. Entrepreneurs values the stock in terms of their ability to return the money invested. Besides, an important financial ratio is Dividend Yield (DY), this identifies return from the investment. The higher the DY, the higher the value of the stock in the market. The critical determinants of DY are purchasing prices and selling prices of a particular stock. Inconsistent and lower dividends reflect low valued stock and thus, poor stock prices in the stock markets. Valuing a stock uses numerous market indexes such as Nasdaq and OTC methods. In each of them, the fundamental value of stock rests on the existing market prices and future prospects.