Now we are shifting focus and are moving toward stocks. Well, clearly the stock market is huge and it's extremely important to come up with certain evaluation approaches for stocks. And that will be the central part of this course. And now we are just beginning. Well, what do we know about stocks in general? We know that these are public securities, that they are traded, that they are risky. And one thing with respect to what we've been learning about NPV is that cash flows offered to stock holders are not certain at all. What is the form of these cash flows? You know that, basically, stockholders, Have two fundamental rights, one is the right to vote and the other is the right to claim, Dividends. Well, as we know, dividends are not paid always. But that means that investors they make their choice about which we talked about in the first week. And they just decide to keep this cash in the company because they believe that for them it's better to reinvest than to pocket this money and then to look for some other ways of investing. Now, the right to vote is very important, but we ignore it for now. Because we will talk about that in the fourth course of this specialization when we talk about [INAUDIBLE]. But for now, we just study stocks with respect to their cash flows. Now, in order to proceed, let's start with the most simplistic example. Imagine the one period project, so you bought a share of stock at P sub 0 here, at point one. You are expected to receive dividend one. And also you can, right after receipt of this dividend, you can sell the stock at the price P1. So what is your expected return on this kind of investment? Well, it's pretty clear, your expected return is equal to. So the cash flow that you receive, this is DIV1 plus P1, then you subtract P sub 0, this is what you've invested, and then you divide that by P sub 0. So if we looked at that, we can find two blocks here. One block is this, this is called dividend yield. And this one is called capital gain. So basically, if this stock does not pay a dividend, then your only expected cash inflow is, if P1 is greater than P sub 0, you decide to sell and then you get some money. If you're forced to sell for whatever reason and there's no dividend, P1 is smaller than P sub 0, then you'll lose money. If, for example you opt not to sell at all at this point, but you receive all of the dividend, then this is your total yield. Well, we can get a very simple example for it if P sub 0 is $100 and P1 is $105. Well, people always expect that the stocks rise. And then if dividend at 0.1 is expected to be $8 per share, then clearly we can rewrite this formula and see that that expected return will consist of two parts. Dividend yield will be 8%, Plus capital gain will be 5%. And the total of 13%, which is a very nice return but clearly this is just an example. Now, what we did so far seems to have nothing to do with PV. We just introduced the most simplistic approaches to expected returns and we analyzed stock cash flows. But it doesn't require a lot of mental advancement to move from this formula to the one that will look very much like the PV formula for the stocks. We will rewrite this equation. We will think thoroughly what this trick would mean. And from that, we will proceed and come very close to the general stock price and formula. That's what we will do in our next episode.
