Question

Explain two ways to evaluate stocks In terms of definition / positive / negatives / example / equation etc.

Answer 1

There are two ways of evaluation of various stocks. These two ways are as following-

A. Absolute valuation-this type of valuation is related to determination of the intrinsic value of the shares which would be done using various kinds of methods like discounted cash flows methods for dividend discount models.

Benefits of these kind of valuation is that value of the stock is depending upon the firm specific factor. shortcoming of this kind of valuation is that this is not the precise method and not completely reliable.

One of the example of this method is dividend discount model which will be calculated using-

Po= D1/(ke-g)

B. Relative valuation method-this type of evaluation is based upon the the value of the competitors and the value of the firm is dependent upon the relative valuation of the competitors and it is calculated using ascertainment of various values from industries ratios.

various kinds of relative valuation methods like price to earning methods for price to book value method are there for calculation of stock prices.

Price to earning method would be calculated by dividing the current market price of the company by Earning per share of the company.