Financial Management: Core Concepts, Third Edition

7.1 Characteristics of Common Stock

Common stock, a financial asset, signifies ownership in a company. Besides selling bonds to raise funds for operations, expansion, or other business needs, selling stock is a major financing source for public companies. Like a bond, common stock entitles the owner to some of the company’s cash flow. Unlike a bond, there is no specific promise of how much you will receive and when you will receive it. With stocks, there is no maturity date, and the asset does not state the promised cash flow; instead, the board of directors determines the dividend payments at a later date. Let us first look at the basic characteristics of common stock, which will help you in understanding the valuation models that follow. As ...