facebookWhat are the pros and cons of buying stocks with Valuation Price compare to buying stocks from the Market price? - Seedly

Anonymous

18 Jan 2021

General Investing

What are the pros and cons of buying stocks with Valuation Price compare to buying stocks from the Market price?

Anyone care to shed light on Stock Valuation Price VS Stock Market Price?

Discussion (5)

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Hi there!

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!

Valuation

Pros:

Allows u to find mispricing, hence opportunities. Can find undervalued stocks for big gains, avoid over valued stocks which may give poor performance over long periods

Cons:

Does not necessarily translate to short term price movement, valuations usually play out over long periods of time.

May also miss out on hype/hot stocks or companies with high implied potential rather than consistent proven cashflow/profit value

Stock Market Price

Pros:

Good for trading

Catch short term movements

Cons:

Uncertain of long term sustainabiility​​​

The stock's price only tells you a company's current value or its market value.

The Stock Market Pr...

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