Stock represents a portion of the ownership in a corporation. Each stock gives the holder the status of shareholder. This status gives rights and obligations.
Stocks are one way to generate financial capital for companies. Stock return defines the way investors decide to allocate financial savings. From a strictly economic point of view, the shareholder has a risk that is directly related to the return. This risk is defined as the random return depending on company performance. The shareholder is also entitled to a reimbursement after the settlement of a company.
When agents in the market buy a stock, they are implicitly buying the following expected return:
where the first right-hand side value is the dividend per share in t=1, and the second-right hand side is the capital gain/loss () in . These two values must be equal to the expected return in equilibrium (left-hand side). This generates the risk related to the expected stock return. This risk is zero for fixed income assets and is positive for stocks.
The equation (1) comes from the buy strategy in t=0, when agents in the market decide to buy (-Po) a stock and then sell it in t=1, where it is possible to obtain . These two values have a present value when is applied. This generates the equilibrium in (1).
Stocks can be divided into ordinary stock and preferred stock. The main difference between the two groups of stock is in the right to vote and the dividend. Preferred stock gives up the right to vote for a defined dividend.
Becchetti, L., Ciciretti, R., Trenta, U., 2007, Modelli di Asset Pricing I: Titoli Azionari, in Il Sistema Finanziario Internazionale, Michele Bagella, a cura di, Giappichelli, Torino
Editor: Rocco CICIRETTI
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