Different Valuation Methods for Stocks – Which Valuation Method is Appropriate?
It is undeniable that the allure of investing in stocks is very attractive. Hence, it is no wonder that a lot of people join in the game of checking the stock market. Every stock market trader, investor, money manager, and many more are seeking to outperform the stock market. Though they call it a game since you’re trying to catch the winning stocks, it is also true for losing cases. As you already know, the stock price doesn’t always reflect the true value of a company due to the constant fluctuation of prices which can be either over-valued or undervalued.
That is why, it is best to conduct a valuation first to determine the winning stocks. However, there are several valuation methods for stocks that you can use to enhance your decision-making process when investing in the stock market. The valuation methods for stocks are categorized in 2 main categories according to its key characteristics such as the following:
1. Absolute Valuation – the value of the stock is derived on the basis of the investment characteristics which are also known as the intrinsic value of the company. This method estimates the value of the stock based on the present value of cash flows and relies on mathematical models such as the Discounted Cash Flow models (DCF), Dividend Discount Models (DDM), etc.
2. Relative Valuation – the value of the stock is derived by comparing the stock price or similar companies. Most often utilizes multiples, ratios, and benchmarks to determine the stock’s value. This valuation method also estimates the value of the company based on the stock’s current price relative to specific factors such as sales, earnings, book value, etc.
To understand better the different valuation methods for stocks under the main categories, feel free to read in detail in this article: Valuation Methods for Stocks: Intrinsic Value vs Market Value. Despite the complexity of the selection of valuation methods for stocks, there isn’t really a guaranteed method that can be used for every case. This means, since not all company stocks are identical, the method used for valuation will vary according to the distinct characteristics and factors that affects the value of the company. However, it is still best to learn about the differences between the different valuation methods so that you will be able to determine which appropriate method to use in the future.
If you’re looking for financial model template for different industries and different use cases, you can download them at eFinancialModels, a platform that provides a wide selection of model templates created by financial modeling experts in Excel. Get this change to create your very own valuation model by using a ready-made template in Excel.
That is why, it is best to conduct a valuation first to determine the winning stocks. However, there are several valuation methods for stocks that you can use to enhance your decision-making process when investing in the stock market. The valuation methods for stocks are categorized in 2 main categories according to its key characteristics such as the following:
1. Absolute Valuation – the value of the stock is derived on the basis of the investment characteristics which are also known as the intrinsic value of the company. This method estimates the value of the stock based on the present value of cash flows and relies on mathematical models such as the Discounted Cash Flow models (DCF), Dividend Discount Models (DDM), etc.
2. Relative Valuation – the value of the stock is derived by comparing the stock price or similar companies. Most often utilizes multiples, ratios, and benchmarks to determine the stock’s value. This valuation method also estimates the value of the company based on the stock’s current price relative to specific factors such as sales, earnings, book value, etc.
To understand better the different valuation methods for stocks under the main categories, feel free to read in detail in this article: Valuation Methods for Stocks: Intrinsic Value vs Market Value. Despite the complexity of the selection of valuation methods for stocks, there isn’t really a guaranteed method that can be used for every case. This means, since not all company stocks are identical, the method used for valuation will vary according to the distinct characteristics and factors that affects the value of the company. However, it is still best to learn about the differences between the different valuation methods so that you will be able to determine which appropriate method to use in the future.
If you’re looking for financial model template for different industries and different use cases, you can download them at eFinancialModels, a platform that provides a wide selection of model templates created by financial modeling experts in Excel. Get this change to create your very own valuation model by using a ready-made template in Excel.
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