Stock Markets

Stock investments provide two types of return: dividend and capital gain.

• Right to dividend,
• Right to preemption,
• Right to liquidation surplus,
• Right to vote and right to participate in management,
• Right to demand information,
• Secrecy liability,
• Capital liability.

Companies may prefer not to distribute dividends. They may use this fund to finance the new investments of the company that is expected to increase the value of the company.

The right to preemption is important for the stockholders to keep the management of the company. For this reason, the stockholders of small companies may be granted preemption rights.

Stockholders may try to change the management through the proxy if they are dissatisfied with the operations and the management of the company.

Stockholders may transfer their voting rights to second persons by “proxy”.

Stockholders have the right to review the profit and loss situation, annual reports and balance sheet within the one year following the general assembly meeting. However, none of the stockholders has the right to learn the company’s trade secrets.

Besides providing rights, holding stocks imposes liabilities to the owners, and these liabilities are known as secrecy and capital liability.

Investors use intrinsic value as a benchmark in order to determine if the stock has a fair price or not. While an intrinsic value greater than the market price indicates an undervalued stock, an intrinsic value lower than the market price indicates an overvalued stock.

Non-voting stocks provide holders with the rights, which are provided by the other stocks with the exception of voting rights.

Macroeconomic factors such as inflation, interest rate, growth and company based factors such as dividend, profitability and capital structure affect the supply and demand of stocks.

In the constant dividend model, the price of a stock is estimated under the assumption that the dividends paid by the company are fixed.

In the Gordon dividend discount model, the price of a stock is estimated under the assumption that the dividends paid by the company grow forever with a constant rate.

Price-earnings ratio is affected by risks and investor behaviors, and therefore may be different than it should be. For this reason, investors should be careful particularly in valuing stocks of developing markets.

By using historical data, analysts create the regression equation and then calculate the next price based on their forecasts for the dependent variables. The weak point of this model is the usage of historical data to determine the regression coefficients and not to consider that these may change for different periods.

The main function of stock markets is to bring the companies and the investors together.

Indices are used as measurement tools in many areas and considered as indicators especially in the field of economy and finance.

Stock indices allow the market trend to be compared with past trends and other markets.

Stock indices are considered as the leading indicators in evaluating economic and financial activities. The sharp declines in these indices may indicate a crisis particularly for developing countries.

Since the indices are well diversified portfolios, index investing is quite popular for investors, especially those who do not have sufficient information about stock investing.

Stock markets contribute to price formation for the financial assets by bringing together a
large number of buyers and sellers. The prices in the stock markets are references for many decisions.

Volatility is a measure of risk that reflects the variability in price or return of a financial variable.