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Date Created: 12/20/15
Small Business Valuation Methods - Low-Risk Investment: Certificate of Deposit Stocks Market Order versus Limit Order A market order allows a person to purchase or sell stock at the best possible price at the time of the transaction, whereas a limit order lets an investor pick a price at which he/she wants to either purchase or sell a certain stock. The drawback is that there is no guarantee that the price will ever reach the limit price chosen by the investor. Making a Market Making a market means that specialists, in this case my broker, are willing to buy or sell stock at a time when other investors do not participate in the transactions anymore. For example, if demand exceeds supply, specialists will sell stocks at a higher price to offset the imbalance. Conversely, if supply exceeds demand, specialists will purchase stock at the lowest possible price. Selling Stock Short There are two reasons I can imagine that people sell short stock: 1) Someone truly believes that the price will decline 2) An individual does not have enough money to purchase the stock and resell it when the price declines. Small Business Valuation Methods Price-Earnings Method In the price-earnings method, expected earnings of a firm per share are multiplied by the mean industry PE ratio, which will equal the valuation per share of stock. Dividend Discount Model The dividend discount model calculates the price of a stock, because the developer of the method, John B. Williams, believed that the price of a stock would reflect the value of the stock considering the present value of a stock's future dividends. Price-to-Sales Ratio The result in a price-to-sales ratio calculation is compared with the price-to-sales ratio of the stock in the past to determine the value of the stock. Capital Asset Pricing Model The capital asset pricing model calculates the required rate of return to make profits on the stock. The higher the required rate of return the higher usually is the risk level of a particular stock. The value of a stock and the risk level are related and experts can estimate the value of a stock depending on the result of the calculation using the Capital Asset Pricing Model. Low-Risk Investment: Certificate of Deposit A person investing into a Certificate of Deposit cannot collect their interest until the specified maturity of the CD. For early withdrawal, a penalty will be charged. Rates and maturities indicate that rates vary among banks. Usually, the longer the maturity term, the higher the interest rate an investor will receive is. The longer the maturity term, the lower the difference between the interest rates of the longer term and the term only half as long as the longer term. For example, for a 6 month CD rate at Bank A, an investor will receive a 0.65 % interest rate. However, to receive an interest rate doubled, 0.65 % x 2= 1.30 %, an investor would need to invest into a CD with a maturity term three times in length. This is just an example and does not mean that at any bank one will receive double the interest rate on a certificate of deposit when investing into a CD with a triple length of the lower interest-rate CD. The trend is however that one will not receive double the interest rate when investing into a CD with a maturity term double the maturity term of the lower interest rate certificate of deposit. gratis casino
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