Stock Valuation In finance, stock valuation is defined as a method for calculating theoretical values of companies and their stocks. Stock valuation is the process of calculating the fair market value of a stock by using a predetermined formula that factor in various economic indicators. The stock valuation is a method that is used to predict future market prices, or more generally potential market prices, and thus to profit from price movement. Stocks have two types of valuations. First is a valuation method that is created by using some type of cash flow, sales or fundamental earnings analysis. The other one is dictated by how much an investor is willing to pay for a particular share of stock and by how much other investor is willing to sell a stock for. The first method is the fundamental valuation. People usually use this valuation to justify the stock prices. An example of this valuations method is the P/E ratio, which stands for Price to Earnings Ratio. The other way in which stocks are valued is based on the demand and supply. The prices of the stock increases with the increase in the number of people who want to buy the stock and decreases with the increase in people selling the stock. The stock valuation has various techniques. The earnings per share (EPS) are defined as the total net income of the company divided by the number of shares that are outstanding. Price to earnings ratio (P/E ratio) is calculated as the current price divided by the sum of the EPS for the last four quarters, or for the previous year. An important note is that the P/Es change constantly. If there is a large price change in a stock you are watching, or if the earnings (EPS) estimates change and to compute the ratio again. The Growth rate includes the growth rate of both the sales and income to predict the future growth of the company. The forecast values help in predicting the growth rate of the company. Questions What is stock valuation? What are the various methods to calculate it?
Posted on: Fri, 25 Oct 2013 15:30:43 +0000