Dividend Discount Model
A stock is worth the present value of its future dividends.
What is Dividend Discount Model?
With no growth, value = annual dividend / required rate of return. With constant growth (the Gordon model), value = next year's dividend / (required return - growth rate). Works best for stable dividend payers; useless for companies that pay none.
Dividend Discount Model: a worked example
$2 dividend growing 3%, 8% required return: $2.06 / (0.08 - 0.03) = $41.20.
More terms in Equities, Funds & Alternatives
Shareholder Rights (Statutory vs. Cumulative Voting)
Voting, preemptive rights, dividends when declared, inspection, limited liability.
Types of Preferred Stock
Cumulative, convertible, callable, participating, and floating-rate preferred.
American Depositary Receipt (ADR)
A dollar-denominated receipt for foreign shares, traded in the US.
Rights vs. Warrants
Rights: short-term, below market. Warrants: long-term, above market.
Restricted & Control Stock (Rule 144)
Unregistered or insider-held stock with resale limits.
Employee Stock Options (ISO vs. NSO)
Incentive options get capital gains treatment; nonqualified options create income at exercise.
Technical Analysis
Forecasting prices from charts, trends, and trading volume.
Fundamental Analysis
Valuing a company from its financial statements, management, and industry.