Common Stock Essay
A common stock yield also known as dividend yield is a financial ratio that measures the total cash given to common shareholders in relation to the market value per share (Accounting Course, n.d.). In other words, common stock measures how much an investor will receive on every dollar invested in shares. The formula for calculating a common stock is Common Stock equal Cash Dividends per Share divided by Market Value per Share (Hill, 2010).
The importance of a common stock yield for an investor is enormous in that it provides the necessary financial information that determines the credibility of the investor’s investment. The yield is used by an investor as a corporate …show more content…
A bond yield has a synonym with a common stock yield, especially in relation to an investment in bonds. The yield on a stock and a bond is no different, except that yield on a stock is computed using dividend, whereas yield on a bond is computed using interest. A bond yield is, therefore, a measure of the amount of return a bond investor will get in relation to the face or market value of the bond, whichever form the bond takes (Investopedia, n.d.). A bond is, therefore, an instrument of indebtedness of the issuer to the holder. There are several types of bond yields, which includes nominal and current yield.
The importance of bond yield to an investor comes in different forms. For instance, a bond yield provides valuable information concerning the interest return from an investment. Furthermore, a bond yield provides an investor with essential clues of future earnings on investments; therefore, enabling the investor to make an educated or informed projection of the bond …show more content…
For instance, because a common stock investor is one of the owners or bears ownership responsibly in a company, if a common dividend is not paid, the recourse available to the stock investor is to express a concern during the annual general meeting of the displeasure of not receiving the required dividend. In a scenario where a company liquidates, a common stock investor’s stocks become valueless and therefore, experience a huge loss (Boundless Finance, n.d.). So, a common stock investor does not have a fundamental legal protection to rely on in these instances.
What recourse do bondholders have available if bond interest payments are not made?
A bond investor’s case is different and has a measure of legal protection. For example, a bond investor is guaranteed to receive, if not all (the interest and invested capital), at least, part of the recovery money back. A bond investor can, as, a matter of practicality, seek a redress in the court of law, if a company is in default of its obligation. Finally, a bond investor can sell all or part of his investment so as to receive immediate cash in return for the company’s default in the payment of interest. These are some of the recourse available to a common stock investor and a bond