Question

Write a 200 word essay for Stock Valuation,Use APA format. All references must be cited correctly. This should be reflective in nature.

Answer 1

Stock valuation is an important tool that enables investors and traders to determine intrinsic value of a stock so that they are able to make informed decisions. Stock valuation is a tool that determines the fair market value of a financial instrument at a particular time. The objective of stock valuation is to predict or forecast the future prices of a stock.

Stock valuation mainly uses two broad categories of methods – absolute valuation and relative valuation. In case of the absolute valuation method the intrinsic value of a company’s stock is determined on the basis of its dividends, cash flows and growth rate. Different methods used here are dividend discount model, discounted cash flow method, and comparable method.

The second category is that of relative valuation method. Different ratios of the company being valued are compared with the ratios of its competitor to determine its value. The commonly used ratios are price-earnings ratios, earnings per share, enterprise value to EBITDA, enterprise value to sales etc.

Stock valuation is very important as the market is not efficient and all information is not fully reflected in the stock prices. As such stocks do not always trade at their intrinsic value and this provides the investors with an upside potential (or the risk of a loss as well). The total potential can only be determined using the tools of stock valuation (Fernandez, P. 2002).

Reference:

1. Fernandez, P. (2002). Valuing Companies by cash flow discounting. Ten methods and nine theories. IESE Business School – University of Navarra.