Stocks in the share market can be analyzed by fundamental and technical analysis. Fundamental Analysis uses financial reports (balance sheet, profit and loss account etc.), economic indicators, industry comparison and demand of the goods produced to predict the present and future performance of the company and hence to predict the movement of share prices.
Once an investor measures out the intrinsic value then the next step is to find in which shares there is much difference between its intrinsic and current market value. So as to say that if there is a wide difference, intrinsic value too high than market value, then there is quite a space for appreciation of shares. In short, the stock is highly undervalued.
In fundamental analysis, it is important to analyze the intrinsic or true value of the share. This intrinsic value is compared with the market value. If the intrinsic value is below the current market value then the investor will not buy the stock as he knows that sooner or later the market share prices will fall, that is the stock is overvalued and vice versa.
Investors like to invest in those companies which are fundamentally strong, which has a good order book, which has good prospects for growth in future and its present stock is undervalued.
Intrinsic value can be found by the fundamental analyzer makes an examination of the future and current, to gauge the holistic health of the economy as a whole.
The fundamental analyst needs few data to come to a conclusion. Firstly previous years data or historical data, secondly data that is available in public domain such as annual reports, and/or press release of the company, and thirdly private information which he gathers from sources inside the company and which is known by the selected few people.
Valuation of equity shares:
- Present value model
We all know that the value of money changes with time (usually decreases). In other words, what we can buy today with a certain amount, after 5 to 10 years its value will not the same. Same applies to future income.
To account for this the future incomes is divided by discounted rates and that value can be calculated as of today. Technically it is called time value of money. These calculations include dividend (if any), bonuses, and residual income and free cash flows.
Value the company as the sum of its discounted future cash flows.
- Relative value models
The share value of one company should be compared with other companies in same industry or sector. Comparing the market price of shares with peers, along with sales, net income, book value etc. The ratios so obtained are compared and conclusion can be drawn whether the present price is justifiable or not.
Value companies based on the price multiples of their competitors.
- Asset-based valuation model
The company is valued based on the market value of the assets and liabilities. Value of the equity can be calculated by subtracting market value of liabilities from the market value of assets. Here while calculating liabilities equity is excluded. One should bear in mind that when calculating assets, they should be tangible long-term ones.
Value of a company = Market value of Assets – Liabilities
More in further blogs….
For Free Share Market Tips Visit: https://goo.gl/2nhRwT