What is common stock?
Common stock as it is called by the America investor is what is normally referred to as ordinary share or Equity.
Ordinary share supply the basic risk capital of the company represented by shares (denominated) with a nominal value for instance in Nigeria of generally between 50k and N1.
The nominal value can be different from the market value and the market value of a common stock /share indicates the current worth of the share at any particular time.
This market value in practical life is changing every day in the stock market.
A lot of model developed in the valuation of common stock prices like the dividend valuation model which is commonly used to value stock indicates that the prices of any share of common stock will be determine by three variable, the level and growth rate of dividend, the risk less rate of interest and risk premium, the formula for the model is represented as.
PDV = Σ Do (1+gt)
PDV = present discount value of the expected dividend.
Do = Level of current dividend
Gt = The expected growth rate of dividend at that time
Rt = The riskless rate
Pt = Premium
T = Time
Apart from the use of models in the valuation of common stock, econometric techniques have also been applied with a degree of success in studies of the determinants of individual common stock prices, relatively little attention had been given to the use of these techniques by economist in forecasting short run movement in aggregate indices of stock prices.
In fact most economist contend changes in stock prices are not amenable to economic analysis.
It is apparently believed that equity prices are determined by chance them reason, the oldest theory and the most valid will be analyzed later in the study, purporting to explain changes in aggregate monetary demand relies on changes in liquidity or the stock of money as the independent or causal factor.
In fact, changes in the stock of money or liquidity influences the willingness of consumers and investors to exchanges money for goods and asset, there should be a demonstrable relation between monetary changes on one hand and business and stock prices on the other.
DETERMINATION OF COMMON STOCK PRICES
Prices of common stock are values attached to ordinary share and the value of any asset is a function of the income derivable from the asset, pricing of commons stock is one of the major determining factors that influences investor in their choice of which types of security to buy and it is after the prices of a security is known that it relative in terms of return on the investment could be determined.
Share prices valuation is founded on the proposition that there exist certain relevant variables and relationship that can be isolated and used in a valuation model. Many of these variable can be quantified and used in mathematical models of share price valuation. While other are simply qualitative by nature and useful in non-quantitative descriptive valuation model, while it is correct to say that there exist in theory of security value.
This theory is represented by wide variety if quantitative and qualitative valuation models.