Description
Corporate Shares are securities that represent an ownership in part of a corporation traded on a Stock Exchange. The sum of all shares represents the corporation capital stock. Each share entitles its owner to a certain percentage of the corporation capital stock. This owner is defined as a corporation shareholder.
Negotiation of Corporate Shares becomes easier if the corporation capital stock is listed on a Stock Exchange. In order to be listed, a corporation must fulfill certain requirements; one, and extremely important, is liquidity, since investors are well protected if they can easily buy and sell shares at any time they wish and at fair market values. A special case is corporations defined as "blue chips”, characterized by high liquidity shares and market capitalization.
The key advantages for an investor that uses Corporate Shares listed on a Stock Exchange are: easily modify investment portfolio, by increasing or decreasing exposure to a certain corporation, change exposure to different corporations and selling all securities in order to get immediately liquidity in return (i.e. money back), by using a simple electronic order.
It is important to emphasize that market price assessment on a Stock Exchange is objective and transparent for all market participants, since an investor is not forced to seek a single buyer or seller for all his securities, the Stock Exchange brings instantly reversing entries.
When a corporation makes a profit, it can split a part or all of it among its shareholders, giving each of them a part that is proportional to their participation in it. Distributed profit divided by the number of shares is defined as a "dividend per share". The non distributed profit is defined as "retained earnings".
Corporate Shares valuation
Most common method for valuing Corporate Shares consists of assessing a corporation ability to generate positive results (profits) or cash flows. In general, Corporate Shares have a different value to different investors; as a result, in a certain moment one may want to buy and others may want to sell.
Thus, value and price are different concepts. In general, the current value of any financial asset is linked with it's expected future cash flows discounted at a given rate when price depends on buying and selling market dynamics.
In the case of Corporate Shares, valuation should be based on future expected dividends and profits. All valuation necessary elements, as well as the chosen method itself and variables to consider, are always subjective factors, such as: amount of future profits and dividends, risks associated in obtaining them (corporation strategy, macro-economics data...), number of periods for which the calculation is performed and which discount rate to be applied on cash flows. In conclusion, the current value of a corporation will be different for each investor.
If for a certain investor his valuation is higher than the market price, he will be willing to buy Corporate Shares at the market price. At the same time, another investor could sell at that price, if his valuation provides a value below market price. Market prices on Stock Exchanges are driven by this type of expectations from market participants.
