Common stock in a publicly traded company is a highly marketable, liquid investment. The disclosure of public information by companies is plentiful and accessible to investors who by consensus agree upon a market share price. If the valuation of common stocks was such a simple matter, a stock price could be calculated by any college graduate except for one factor, market sentiments. Market sentiment help explain why a stock’s market price can deviate from the true value of the company’s stock price. Common stock’s primary source of investment return is capital appreciation. Dividends can provide a significant increase in shareholder return when reinvested. Dividends paid on stock held for more than 60 days receive favorable tax treatment at tax rates below interest income for most investors.
Common stocks represent the growth portion of the investment portfolio. Common stock investments are factored into the investment strategy by the allocation of the funds in proportions specified in the investment policy statement. As a practical matter, client investments have to be classified according whether invested in cash, fixed income and equities for each account. The investment selection process requires further classification of the investments in common stock according to certain investment characteristics including:
- Selection Style;
- Market Capitalization;
- Industry/Sector;
- Foreign Non-US;
- Emerging Market;
- Single Country; and
- Market Correlation;
Based on current market conditions, the recommended allocation of funds in common stock can be changed within the range of allocation percentages specified in the investment policy statement. There are unique factors and considerations for a client account that can affect the asset allocation. Some of these factors include:
- Trust;
- Custodial;
- Restricted List;
- Tax Sensitive;
- Qualified Plan; and
- Securities Concentration.
