Placing a value on the stock of a company is an important factor for every stockholder or for every investor who wants to buy or sell the stock. Such a valuation will show the market worth of the company.
Valuation is the first step toward intelligent investing. When an investor attempts to determine the worth of shares based on the fundamentals, the investor can make informed decisions about what stocks to buy or sell.
The stock market is a highly illogical place where greed and fear are strong market driving forces.
One of the most intelligent and disciplined investors who is a close second to the world's richest billionaire Bill Gates is Warren Buffet.
Buffet uses a techinique called value investing or growth investing wherein he looks for stocks that trade for less than their intrinsic value. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, causing stock price movements that do not correspond with the company's long-term fundamentals.
Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields. Value investors look for securities with prices that are unjustifiably low based on their intrinsic worth.
Intrinsic value is a tricky subject because there is no universally accepted way to obtain this figure. Most often intrinsic worth is estimated by analyzing a company's fundamentals. Two investors can be given the exact same information and place a different value on a company.
For this reason, another central concept to value investing is that of "margin of safety". This just means that you buy at a big enough discount to allow some room for error in your estimation of value.
The fundamental and technical debate:
Investors have been debating the success of investing on the basis of fundamental analysis versus the technical analysis. Fundamentalists look for the stocks consistent earnings improvement, strong profit margins and a high return on equity. Technical analysts use charts to study the movement of the market. Investors using either of this method would swear that theirs is the more profitable method.
Value or growth investors focus on the market rather than get worked up by what is happening with the DOW or S&P 500 index. Savy investors know how to decimate the clutter of noise in the 24/7 news media and select under valued stocks and keep track of them.
As the saying goes in the market, invest like a tortoise and profit like a hare.
As a growth investor, take a long-term view of investing without worrying over the day-to-day fluctuations of the economy, interest rates, and the overall market. In the longer term, these changing variable will have little impact on the growth stocks.
More on Value Investing.
Selecting stocks at the right time.