I am interested in improving myself even though I mainly do index investing.
3
Discussion (3)
Learn how to style your text
Reply
Save
Investors often try to identify and capture market inefficiencies through fundamental analysis. For equity investor, this process means a thorough analysis of a company's business model, its prospects, and its financial situtation.
There are many methods. You could use relative valuation to compare financial ratios of the firm with its competitors to guage its performance. This method assumes that common shares of companies with similar risk and return characteristics should have similar price multiples.
You could use the discounted cash flow method. For example, you could project a company's free cash flow using discounted cash flow method, then using capital asset pricing model to calculate weighted average cost of capital and from there determine the fair value of today's equity. While this method is more often used, it has a lot of assumptions and should not be taken face value.
You could also use asset-based valuation weere you estimate the value of the stock by calculating the difference between the value of the company's total assets and its outstanding liabilities. However, this method implicitly implies the company will stop operating and essentally provides a liquidation value.
Often, investors use a mix of methods and do not just soley on one. It was easier back decades ago when information was not so accessible and the market may not have quickly evaluated and priced in a company's financials. Today, with the internet and many professional analysts armed with Masters or PhDs, it is much harder to beat the market consistently.
Reply
Save
Write your thoughts
Related Articles
Related Posts
Related Products
4.5
957 Reviews
US$1
MINIMUM FEE
0.03% to 0.08%
TRADING FEES
Custodian
STOCK HOLDING TYPE
4.7
476 Reviews
4.9
124 Reviews
Related Posts
Gordon Growth Model for dividend paying stocks