18 Jan 2021
Anyone care to shed light on Stock Valuation Price VS Stock Market Price?
The stock's price only tells you a company's current value or its market value.
The Stock Market Price represents how much the stock trades at—or the price agreed upon by a buyer and a seller. If there are more buyers than sellers, the stock's price will climb. If there are more sellers than buyers, the price will drop.
On the other hand, the Stock Valuation Price is the intrinsic value of a company's actual worth in dollars. This includes both tangible and intangible factors, including the insights of fundamental analysis.
You can use 2 valuation methods, namely, Absolute Valuation & Relative Valuation. The 2 popular methods to do stock valuation are called the Dividend Discount Model (DDM) & Discounted Cash Flow Model (DCF).
Stock Valuation should always be the way to go as it will allow you to know whether a stock is undervalued and overvalued and often times you wanna buy a stock that is undervalued as you may perceive that the stock’s future price to increase.
One exception to this case is Tesla. The reason people are simply buying Tesla based on its market price rather than its valued price, which is way way lower than its current market price, is the promise and hope of future returns from positive company announcements and the idea of FOMO. Hence, many buyers jump into the stock for now simply because they believe the valuation of Tesla will catch up to its current market price.
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This is an often overlooked question.
Not to confuse valuation price and stock price, I will use the terms Valuation vs Market Price.
Valuation is an output and could be a range of numbers that can be derived from many different valuation models. The inputs are usually estimates that we come up with, with the help of past financial data. Essentially what we are trying to do when calculating the valuation of a company is to try and project how much it can be worth in the future. The MAIN POINT about valuation is paying (in terms of market price) much less for a company that you know is worth much more. If I asked you to name me a price for a $10 note, I would expect an answer such as “$1”, or maybe even lower. That is why we invest in the first place. There is NO VALUE if you paid $10 for something that is worth $10.
We need to know the value of something before deciding how much to pay. You don’t want to end up overpaying, like $15 for a $10 note. Of course when it comes to companies it isn’t so straightforward. Nobody knows the true value of a company now, 3 years later or 10 years later, not even the company itself. The best we can do is to use appropriate models, and by giving the most reasonable (or conservative) estimates and assumptions to help us calculate a range of values.
Market price is just an offer, a figure that two people agree upon for a transfer of ownership of shares (transaction) to occur.
If you find yourself getting a valuation of a Company A to be $100/share, and the market is offering $80/share, you might have found a bargain. If we switch the two numbers around, the market might be overpricing it. Ultimately, the assumptions and estimates made are the factors that determine the outcome, and given time, the market will slowly adjust itself (through all the ups and downs) to reflect the value of the company in the long run.
This is what I understand about Valuation vs Market Price and I hope my attempt to explain it clearly is successful!
Allows u to find mispricing, hence opportunities. Can find undervalued ...
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