Common Stock Vatuation

The theory surrounding the valuation of common stock has undergone profound change during the last few decades. It is a subject of considerable controversy, and no one method for valuation is universally accepted. Still, in recent years there has emerged growing acceptance of the idea that individual common stocks should be analyzed as part of a total portfolio of common stocks that the investor might hold. In other words, investors are not as concerned with whether a particular stock goes up or down as they are with what happens to the overall value of their portfolios.

This concept has important implications for determining the required rate of return on a security. We shall explore this issue in the next chapter. First, however, we need to focus on the size and pattern of the returns to the common stock investor. Unlike bond and preferred stock cash flows, which are contractually stated, much more uncertainty surrounds the future stream of returns connected with common stock.