Dividend policies and stock prices are interrelated, as the price of the investing stocks in which you have invested your savings is 99% dependent upon the dividends declared by the company.
There are different models to determine the stock price depending upon the dividend policy, let us have a look at them.
There are 5 basic models for evaluating market price of the share; these are:
1. Traditional Model
2. Walter Model
3. Gordon Model
4. MM Approach
5. Corporate Dividend Behavior Model
In Walter Model, Gordon Model, and MM Approach, the dividend & growth rate is discounted by the cost of capital. These models are selected according to the type of the company’s share. The analysts use these models to understand and know the price of a company. However, the selection between the Dividend Discount Model and Gordon Model is to be done carefully.
If we talk about the dividend discount models, then these too are considered important for evaluating the cost of the capital and the growth rate. It is also based on discounting the dividends of a company with growth rate & fair price. However, understanding about the impact and usage of received data is important. This would make you analyze the actual price of the stock and even investors can make the changes accordingly.
How to realize the best time to get maximum value of the shares:
To attain the maximum profit, it would be best to invest when the stock is underpriced. This would gain maximum profit because during this the current market price of the share is less than its intrinsic value. This also states that if you already have purchased such share, then it would be a worst decision to sell underpriced share during that time. To sell the underpriced share, wait for the market to rise again. Also, when the price of the stock is high, or say, it is overpriced i.e. higher than its intrinsic value then simply sell those shares to earn higher profits.
To be a wise player in the stock market, it is important to have knowledge about such essentials. Make good use of the different models for evaluating market price of the share, remain attentive and gain maximum profit for your savings & investments.
About the Author
Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.Follow @SanaSecurities