Question

How would you arrange these concepts in terms of concreteness (from most to least concrete)? Justify your arrangement.

Asset

Common stock

Equity

Investment

Security

Stock

Answer 1

Below is the arrangement of concepts in terms of concreteness (most to least):

1. Stock 2. Common Stock 3. Security 4. Investment 5. Asset 6. Equity

Justification : As per my understanding, I have arranged all concepts based on how easily can we do the valuation and the scope of a particular concept.

Stock is a current asset i.e. the valuation of stock can be done on an yearly basis. Since, it is short term in nature and can be valued at cost using methods like FIFO, LIFO, etc. Cost is easily available by looking at the invoices, purchase orders, etc.

Common Stock is a long term liability also called as equity shares. They can be valued using different techniques like Dividend Discount model. Stock prices are easily available in the exchange markets.

Securities comes next as they are wider than Common stock. They are the tradeable financial instruments. They are divided into three parts - equity securities, debt securities and derivatives. We can value securities from the market which is determined by the demand and supply forces.

Investments includes short term and long term investments. They are valued at the lesser of cost or fair market value. The market value of investemnts can not be seen on stock exchanges and hence lesser concrete than securities.

Assets includes both short term and long term assets. Fixed assets like Long term investments, building, factory, machinery and current assets like Stock, short term investments, account receivables, cash are included in the broad defination of assets. Hence, investments are a subset of assets and hence more concrete than assets. Again, there is no trade market for assets to do the asset valuation.

Equity is difference between assets and liabilities. Equity is a wider term which includes common stock, preffered stock, retained earnings (calculated from Income statement), security premium, revaluation reserves (calculated as the difference between the fair market value and book value of assets). Hence, they can be regarded as least concrete of the given list.