Question

What factors determine a stock’s price: the long-term dividend & growth or the short-term dividend & growth? Why?

What is the similarity/difference between preferred stock and bond? How about their valuation methods?

Discuss the relationship between unemployment rate and stock market performance.

Answer 1

The long term dividend and growth will determine a stock's price as the price represents all the future cash flows discounted to the present. If we count only the short term cash flows, it might create a disconnect and high quality stocks will come down all of a sudden because of bad performance in one quarter, which isn't seen usually. Similarly, loss making companies would have negative stock prices bybthe short term method.

Preferred stock like a bond involves guaranteed yearly payments to the shareholders but they are different in the sense that the bondholders are paid first and holding a bond doesn't give one the ownership of the company. Their valuation method is also similar where we discount the future cash flows to calculate the price.

Unemployment rate is correlated with the economic activity in the country. If the activity is more, unemployment is less and vice-versa. The stock market performance is also correlated with the economy's performance in that if the economy does well, the stock market also does well. Hence, unemployment has a negative correlation with the stock market.