The method of valuing shares can have different ways and every investor approaches it differently. The end result of such varied methods leads to varied results and ideas, which might not be close to perfect sometimes and hence, there is no scientific way to go about it but it is an art.
Shares are simply a small part of a company. In business terms, the share numbers indicate a biased ownership in a trade. It is significant to know the company’s background and history if one intends to keep the stakes for a longer period of time. It helps when you know about the company’s yearly report and acquiring a sound business sense which enables you to learn a lot about the prospects of the company. Here are a few facts that every beginner must know before dealing in shares:-
- Combine business knowledge with investment updates- One should keep himself abreast about the latest news on stocks and check if he needs to buy more of them. You need to know the exact time to sell the shares and this would be possible only when you have a concise reason behind a certain investment.
- Thoughts on value– The stocks have a certain value. If you pay a higher price for your stocks, the returns can be minimal.
- Cash against deploying capital – The cash which has been kept aside to invest , if invested in typical companies who have hiked their prices, then one might miss the bus when other investment options come along. Being patient is a must here as you need to wait for good investment opportunities.
- Basics of Valuation– You can gauge your stock value by ways which is discussed below.
- Smither’s q ratio – The concept here is to emerge with a single number that puts the replacement cost of a market. The value is defined such that if it is less than 1.0, it is underpriced and over 1.0 indicates overpriced.
- Shiller’s pe10 –it has been found that the PE ratio tends to be exact in cases when the earnings have been consistent for more than ten years instead of a certain definitive time period. The method is broadly used to establish the broader market and not on individual company share.
- Price to Earnings– The stock price and earnings from profits are discussed here. PE ratio can be achieved by dividing the share price by the earnings and this ratio may vary from one sector to another.
- Price to Book – Put into account the recent share price and divide it by the previous quarter’s book value per share and you get the price to book. The stress is on the fixed assets valuation here.
- Price To Sales– This can vary and is used to conclude the rise or fall of the share price against the surge and fall of sales. A peek into the historical PB value for the company and the industry is handy.