Stock valuation Guide, Meaning , Facts, Information and Description
There are several methods used to value companies and their stocks.The most theoretically acceptable stock valuation method, called income valuation or discounted cash flow method, involves discounting the revenues (dividends, earnings, cash flows) the stock will bring to the stockholder in the foreseable future, and a final value on disposition. The discount rate has to include normally a risk premium.
In some cases an asset valuation is also made. This entails analysing the assets and liabilities of the firm. This type of valuation is typically done if the company is expected to cease operations. It will provide a "termination value" rather than the "ongoing operations value" obtained from the income valuation method.
Some feel that if the stock is listed in a well organized stock market, with a large volume of transactions, the listed price will be close to the estimated fair value. This is called the efficient market hypothesis. On the other hand, studies made in the field of behavioral finance tend to show that deviations from the fair price might be rather common, and sometimes quite large.
See also:
- List of valuation topics
- business valuation
- stock image coefficient
- capital asset pricing model
- value at risk
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