Time Value of Money

The time value of money notion states that a unit of a dollar obtained today is worth more than a unit of a dollar received at a later date. The main rationale for this principle is that the money obtained today can be invested, resulting in additional money (Lewin & Cachanosky, 2015). Another reason is that when a person chooses to receive a specific quantity of money at a future date, the person is deliberately lending it out, and certain risks are associated in that process, such as inflation and default risks. The inflation results from the general rise in the prices of goods caused by economic factors. The default risk arises when the borrower fails to pay back the amount of money to the lender. The sum of money that is invested in a particular company regarding share can generate returns such as dividends at a future date.

The time value of money is crucial in the stock market because it enables the investors to compare and find the value of the future sum of money. When an investor buys a certain amount of stock, the theory of time value of money gives the investor a chance to use a mathematical formulation to estimate the amount of money they can generate at a future date. A calculation made today can tell if the stock is worth investing in. Some of the stock investments do not guarantee payouts after a certain period hence they have to be adjusted based on the specific risk factors that are involved as well as the time value of money.

Characteristic of Preferred and Common Stock

The preferred stock has the characteristic of bonds and common shares. Just like any share or stock, the preferred stock gives the organization a certain percentage of ownership in the firm. , just like the bonds, the preferred stock does not have voting rights in the company. This form of stock is always issued with fixed dividends just like loan or bonds, but like the common stock, the preferred stock is not guaranteed to receive dividends (Boudry, DeRoos, & Ukhov, 2016). The preferred stock has several characteristics such as the call for provision, convertible features, and redemption date. In case a company is liquidated the preferred stock holders are paid first followed by the commons stock.

Companies that do not raise funds through the issue of common stock do not incur any debt. The firm is only to pay dividends only when a company generates profits. The common stock highlight the unit of share that invested in a company and each unit is entitled to an amount of ownership. The common share gives investors a right to sell shares in the secondary market either through the private transaction or public exchange. The common shares have more rights that preferred stock such as voting rights at the annual general meeting. When accompany is liquidated, the common stock owners are paid last. If an organization sell fifty percent of its common stock, it risks losing control of the company.

Risks of Preferred and Common Stock

The owners of the common shares have no guarantee to receive dividends. The common stock tends to be volatile and is taken to be the high-risk investment. In case the company faced liquidation the commons stockholders ranks last when it comes to payment-preceded stockholders, bondholders and creditors are paid first. The preferred stock is interest sensitive. As the current prices of interest rates fall, the market price of these shares rises. As the current interest rates of the preferred stock rise, the price of the preferred price tend to fall.

Financial Data

The financial data are summaries of monetary of monetary data from organizations. Some of the most common sources of financial data include the statement of changes in equity the balance sheet and the income statement (Groot, 2017). The financial data is used by government regulatory agencies, creditors, investors, labor, and management the nature of the organization that is involved ultimately affect the kind of data that exists in the books of account. The financial data analysis is an evaluative method of determining the projected, the current, and the past performance of the organization.

The evaluation of inventory data can help analysts and manager to determine the amount of stock they must hold in certain periods of the year for instance for a supermarket there is need to keep a lot of stock during the festive seasons. Keeping too little or too much stock must create shortages and increase costs respectively. The company must always maintain optimal stock.

Financial data can also be used to make the stock price predictions. For instance, when debt to equity ratio is rising based on historical data investors can determine that the price of the stock will drop. An investor will also assess the business performance based on the historical data before investing in a specific company.

References

Boudry, W. I., DeRoos, J. A., & Ukhov, A. D. (2016). Diversification Benefits of REIT Preferred and Common Stock: New Evidence from a Utility-based Framework. Real Estate Economics. doi:10.1111/1540-6229.12166

Groot, M. (2017). Taxonomy of Financial Data. A Primer in Financial Data Management, 19-64. doi:10.1016/b978-0-12-809776-2.00002-8

Lewin, P., & Cachanosky, N. (2015). The Time-Value of Money and the Money-Value of Time: Duration, Roundaboutness, Productivity and Time-Preference in Finance and Economics. SSRN Electronic Journal. doi:10.2139/ssrn.2613469