Valuation of common and preferred stocks

Abstract

Buying stocks is a modern way of investing. The investors may place the available capital on the domestic and foreign stock market, they may buy more stocks of a single issuer or distribute money to purchase stocks of various public (stock-exchange) companies, and they may form a portfolio of various securities. The investors' decisions on these options are based on their estimate on returns and risks underlying individual security instruments (securities). The two basic approaches to valuation of common stocks are: the Present Value Approach (method of valuating the capitalization of income) and the P/E Ratio Approach (the method of valuating the multiple of per-share earnings). Instead of viewing these methods as competing alternatives, they should better be viewed as mutually complementary methods. Both methods are equally useful and their concurrent use may provide better grounds for the analysts' valuation of stocks.