An investor should value a stock by looking at the intrinsic value of the stock and how the market value compare to the intrinsic value. The most common mathematical method of valuing stock is to determine the price earnings ratio (P/E).
The P/E ratio is calculated by dividing the share price by the company’s net income. As a general rule a P/E ratio should be in the higher teens. Stocks with a below-market P/E are considered cheaper, and a higher P/E ratio are considered expensive (Kansas, 2014).
To evaluate if a stock is under or over-valued investors should look at the CAPM (Market securities Line) based on the Beta of the company and determine the performance of the stock.
An investor can use indexes, such as the Dow Jones, NYSE, or S&P 500, in stock valuation. Value investing is common for investors. It is misrepresentation of price so the buyer buys a stock at a lower price than true worth or sells at a higher price than true worth. Considering all variables and determining true fault in price, this method provides investors easy margins. Investors’ value stocks using various strategies and methods, but all driving factors are in hopes of gaining margin and growth of the company invested in. The concept of stock valuation is simple. However, predicting the future is not as simple and can be complicated. Market Valuation of Stock
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Market and investors value stock differently. The market depends on expectations and recent information available to the market. The market’s value of stock are usually based on past history and trends. Based on current economic conditions we look at the past and see how it would look going forward. Through use of charts, value lines, or other indicators, the market looks at certain things such as floors, ceiling, resistance points, when valuing stock. The stock value is a collective price based on numerous variables considered, equaling a company’s worth combined with social trends and economic factors. The most common value of a stock for the market is the open and close prices.
NASDAQ uses an auction approach called opening cross and closing cross to determine stock prices (“Stock Market Prices”, 2014).
The opening cross uses computer software to determine opening prices for stocks based on night trading; buying and selling of stock during close of business. The closing cross software calculates closing price based on that day’s trades. The technology takes into consideration each trade made at the exchange and sets what is referred to as the fairest closing price. The final stock prices are released after close of the exchange and work as a main factor for night trading. The amount an investor is willing to pay is often dependent on the prices set by the market.
Stock Market Prices. (2014).
http://money.howstuffworks.com/nasdaq-opening-closing- cross1.htm
Kansas, D. (2014).
Evaluating a Stock. Wall Street Journal. Retrieved from http://guides.wsj.com/personal-finance/investing/how-to-evaluate-a-stock/.
