How is the Price of a Stock Determined?
By Joseph Nicholson,
eHow Contributing Writer
There are many ways to value a stock, and the method to use might vary based on the type of company and the general investment climate. A stock market is the sum total of investors' valuation of stocks at any given time, and fluctuations in prices represent changing moods and reactions to ongoing developments.
Instructions
Things You'll Need:
* Financial statements Access to financial websites
1. Step 1
Obtain the data. The place to start when valuing a company is gathering press releases, financial statements, analysts opinions and other relevant information. The company's financial statements, probably the most important data, are available through the quarterly report, and usually are online.
2. Step 2
Choose a method. While knowing all the key metrics is important when considering a stock's value, every company cannot be compared in the same way. P/E, for example, is probably not the best way to value a start-up that is yet to generate any profits. Revenue or sales growth might be more appropriate. In contrast, the price-to-earnings ratio may be an excellent way to evaluate a profitable and quickly growing company.
3. Step 3
Calculate key metrics. Valuation methods which rely on the fundamentals of a company--those that are not purely technically oriented--use financial ratios calculated from information provided in financial statements. These ratios include return on equity (ROE), price-to-earnings (P/E), price-to-sales (PSR) and others. Some metrics are already figured and available on financial websites.
4. Step 4
Compare with similar businesses. One of the best ways to value a stock is to see how other similar businesses are valued, whatever metrics are used. Most of the time, the better business will be more highly valued as reflected by the stock price. Comparisons within a specific sector are among the most common.
Tips & Warnings
* The price of a stock reflects the value of future performance. In other words, information that reflects the past is less relevant than what may affect earnings in the months and years to come.
* Valuation is not an exact science and tends to fluctuate with perceptions about the economy. In boom times, valuations will probably expand beyond what may seem reasonable, just as they may be crushed in the bust cycle.
Resources
No comments:
Post a Comment