1. Write a discussion post answering the question below min 250 words ( examples are
below under #2)Two primary approaches for analyzing and selecting common stocks
are fundamental analysis and technical analysis. Please explain the difference between
the two.
What is a Dividend Discount Model? When to use it and how to apply it?
2 . write a discussion response/ peer review to each of the below discussions, this is also
an example on how #1 is supposed to be done.
Student #1 Melly
Two primary approaches for analyzing and selecting common stocks are fundamental
analysis and technical analysis. Please explain the difference between the two.
Fundamental analysis refers to a method used for analyzing any investment in stock or
security by estimating its intrinsic or actual value (i.e. related economic, financial, and other
factors). It is mainly used for investment and commence with a long term approach of
analyzing market. Meanwhile, technical analysis is the study of the trend and momentum in
a stock’s price and volume with the help of charts in graphic form. Technical analysis
concerns with the price movements in the market. It is mainly used for trade and
commence with a short term approach of analyzing market. Technical analysis includes
things like Profit/Earnings ratio, 90 day moving price average, leading indicators, and other
statistics. Basically, investors (long term) use fundamental analysis because they want to
hold on to the stock for more than 10 years, while traders (short term) use technical
analysis as they want to hold stock for a short period and then resell to make profits
(Schlichting, 2013). Therefore, fundamental and technical analyses are on completely
opposite sides of the spectrum.
What is a Dividend Discount Model? When to use it and how to apply it?
The Dividend Discount Model, or DDM, is a method aiming to estimate the current
value of a stock based on assumptions of its future dividend performance. DDM uses stock’s
price, company’s cost of capital, and value of next year’s dividend to determine the intrinsic
value of a stock (Jones, 2013). If the present value of a stock is higher than its current value,
then the stock is undervalued and is considered as a smart investment because the returns
might generate dividends that exceed the initial capital needed to buy the stock. However,
if the present value is considerably lower, the stock is overvalued and might fail to make
sufficient returns. DDM is mainly used by investors and analyst to choose the appropriate
stocks. Therefore, it is best applied to well-established firms with a steady track record of
consistently raising dividends. Furthermore, investors normally use DDM to value stocks
that have just been issued or traded on the secondary market for years. DDM is inapplicable
when the stock does not issue dividends or has a very high growth rate, and when firms do
not pay dividends (Olweny, 2011).
References
Jones, C.P. (2013). Investments analysis and management (12th ed.). Hoboken, New Jersey:
John Wiley & Sons, Inc.
Olweny, Tobias. (2011). The Reliability of Dividend Discount Model in Valuation of Common
Stock at the Nairobi Stock Exchange. International Journal of Business and Social Science,
2(6): 127-141.
Schwager, Jack D, & Etzkorn, Mark. (2017). A Complete Guide to the Futures Market:
Technical Analysis and Trading Systems, Fundamental Analysis, Options, Spreads, and
Trading Principles (2nd ed.). Hoboken, New Jersey: John Wiley & Sons, In
Student #2 Tiffany
The two primary methodologies for analyzing and selecting common stocks are
fundamental analysis and technical analysis. Fundamental analysis looks to approximate the
intrinsic value of a stock, which is a function of its expected returns and risk. Key
methodologies to valuing common stocks using fundamental analysis include discounted
cash flow calculation and the earnings multiplier methodology, in addition to relative
valuation techniques (Jones, 2013). Technical analysis is described as utilizing specific
market generated data for the analysis of both aggregate stock prices and individual stocks.
The purpose of technical analysis is to detect trend variations at an early stage and to
maintain an investment position until the data shows that the trend is reversed. Technical
analysis is also called market or internal analysis, because it utilizes market data to analyze
the demand for, and supply of, shares of a stock, or the entire market. As a result, technical
analysts believe that the market data is the best source of data. The concept of technical
analysis is that the price movement of a security reflects all information about that security.
Unlike fundamental data, technical analysis is based on published market data; like as
earnings, sales, growth rates, or government regulations.
The Dividend Discount Model (DDM) is valuing the equity to the firm. The DDM is
highlighted in all valuation discussions and can be regarded as the foundation for common
stock valuation using discounted cash flow techniques (Jones, 2013).
The Dividend Discount Model (DDM) states that the estimated value (per share) of a stock
today is the discounted value of all future dividends. All valuation models include
guesstimates because all valuation models are dealing with the future. The Dividend
Discount Model has three growth rate cases; the zero growth rate case, the constant
(normal) growth rate case, and the multiple growth rate case (Jones, 2013).
Reference:
Jones, C. P. (2013). Investments analysis and management (12th ed.). Hoboken, NJ:Wiley.
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