12.03.2011

Investment: Stock Valuation

investment, stocks
Investment isn't an easy thing, especially when you understand what are you doing. If you don't understand the basic finances that lays beyond the surface of investment then you are just skying over the top of water, but when  you lose speed you immediately start to drawn. That's what happens when you you are investing in stocks and other investments but do not really know what are you doing. Believe or not, most of the investors are doing exactly that and almost every investor starts from this stage. 

The knowledge and wisdom comes slowly, after many years of experience in investing; only then some investor can say that he is really understand what is he doing. if you want get closer to that understanding and do it faster, you should get known about investment finances. The main thing in it is stock valuation. The goal of stock valuation is to determine the potential value of an investment (stock) and compare it to the price on stock exchange. If valuation says that the value is higher than stock price on the market it means that it can be a good investment opportunity. 

There are two main types of valuation of shares: relative valuation and DCF valuation. Comparative stock valuation is based on valuation multiples as price earnings (P/E) ratio, EV/EBITDA ratio, EV/S ratio, PEG ratio: investinforbeginners.eu, P/NAV ratio and many other ratios. Those ratios are calculated for the assessed company and for many comparable companies. Comparable companies have to very similar to the valued company. If companies will be different then comparison will be false - it is natural that different companies have different valuation multiples or ratios. Every business is different and valuation of every business is also different. It is a natural thing and every investor has to know it, otherwise he will fail in understanding the value of stocks and investment basics. 

DCF valuation is based on discounted cash flows. This method is very detailed and takes a lot of time ti prepare it. It is not advisable for beginners at investing and mostly is used by professionals. However, you don't have to do everything by yourself because you can find many investment researches on the net, where a lot DCF valuations are available. You may use those DCF valuations for your purpose in investment decisions. Of course you should trust it blindly and get you own analysis, but you won't be needed to do all the work by yourself and it will safe a lot of time, which can be spent for the search of new investments. 

Right valuation knowledge do not guarantees for you good results from investing in stocks, but you at least will know in what stocks you are investing, what is the risk, what is possible return compared to other stock and etc. 

If you are beginner at investing, you obviously have know how to valuate stocks and other investments. It is a basic which will lead you to the new ways later. Don't forget it.