Gordon Growth Model Free Essays

What is Gordon Growth Model, â€Å"This model is use to determine the fundamental value of stock, it determines the value of stock based on sequence or series of dividends that matured at a constant rate , and the dividend per share is payable in a year† Stock Value (P) = D / (k – G)————–Equation 1 Where D= Expected dividend per share one year from now G= Growth rate in dividends k= required rate of return for equity investor This model is useful to find the value of stock, with following assumption should be taken into account while calculating value of stock, which are: 1. That dividends remains to grow continuously on a constant rate 2. The growth rate should remain less than the required return on equity Relationship between monetary policy and stock market Monetary policy is a state owned measure which is an an important determinant of stock prices , lowering of increase in interest rate couzld be use by fedration to influence stock prices. We will write a custom essay sample on Gordon Growth Model or any similar topic only for you Order Now it is very useful to find theâ€Å"value of stockâ€Å". Monetary policy effetcs stock prices in two ways: 1. When in certain circumstances when the federations or the controller of monetray policty lowers interests rates, the return on bonds or securities (which is also considered as an alternative assest to stocks) decreses, this results that the investors who have invested ,are ready or accept to receive a lower required rate of return on an investment in equity. This will automatically reduces the amount of equity , hence it will also lower the (k – G) (denominator in Gordon Growth model). The lowering of this denominator will lead to increase in the value of stock (price of stock). Hence it will increase stock prices. The lowering of interest rate is also a way from the federation to stimulate and energise the economy, this will help to have a higher growth rate in dividends. The rise in dividends can also results the denominator (k – G) to decrease, it also results in higher stock prices . 2. The denominator in equation is always under the monetary policy influences. Because of that, the stocks and stock prices are also influenced by monetary policy. This model clearly demonestrate how monetary policy influence not only stock markets but also investors , stackholders, those who are investing at that particular time. It is always have been seen that the stock market analyst keep an eye on monetary policy measures as monetary policy always an important factor to know the stock prices etc. The relationship between stock prices and monetary policy is an important factor that directly impacts the economic situation of a country, so this measure should be use carefully. Should one follow the typical recommendation of an investment advisor to buy an actively managed mutual fund? If we are really interested in having a real outcome or return on our investment then it is not an ideal thing to follow the typical recommendation of an investment advisor: this recommendation could be from a direct advisor or we can have such information or prediction read outr from article or news etc, I f we really want to buy some already active mutual funds than it is totally not enough to go on word of the mouth of someone or listen to hot tips from our investment advisor. Basically it is all about correct and uptodate informations oft he market,this can be a useful way of knowing and gaining profits as an investor. One oft he most important factor which an investor can do is, not always buyand sell securities, for those who are interested in buying mutual funds,it is a best practice to buy no-load mutual fund,which are with lkow management fee. Plus it is also important that we should always be informed about the market, especially any new information about our intended funds that we are interested in buying. From studies it has been established that having a good track record of past performences when investing does not guarantee that the future will also be bright. This is what the efficient â€Å" market hypothesis predictsâ€Å". How to cite Gordon Growth Model, Essay examples