How Do Stocks Get Their Value?

Fortunately, as investors, we do not need to figure out the value of a stock, since the experts do that for us. Each and every stock that is available for purchase is assigned a dollar value based on a number of criteria, and derived from a verity of methods.

The basic criteria considered are often referred to as fundamental and behavioral. Fundamental criteria include mainly economic conditions both externally and within the company that can affect a stock’s value. Behavioral criteria are primarily focused on the attitudes of investors towards the company, and how they feel about the company brand, its history and its potential for growth.

Many factors are taken into consideration when a company first decides to offer shares to the public, such as inventory and profit analysis, past company performance and the current economic climate. Some methods for valuing stocks are as simple as completing a mathematical formula and some are so complex that computer software is required. The fact is, there is really no one way that can be used to achieve the perfect evaluation. And while this may seem detrimental, it is still most imperative that some valuation be complete in order to help investors make wise decisions. This article will explain the basics of stock value assessment.

EBO

This valuation model, the Edwards-Bell¬-Ohlson method, is one of the most well known formulas used for stock valuation. It primarily takes into account such things as rate of return, dividends, and book value and future earnings when determining the value of a stock.

Levered Beta EBO

Similar to the method described above, this method varies in that it takes into consideration the debt level connected to a particular stock which can ultimately impact its value.

Risk Proxy

This method of stock evaluation utilizes proxies to analyze risk instead of risk and beta features that other methods use. This means that factors such as capitalization, estimated earnings and debt to market ratio are used to reach the final valuation.

PEG

This method is a very simple formula that is worked around the ratio of price per earnings to the growth rate of a stock. Basically, a company’s earnings are divided by the number of stocks that are held by investors to give earnings per share number.

Forward P/E Value

A very simple method for valuing stocks, this formula is worked by comparing current per earning share value to project per earning values to achieve a real time stock valuation.
These are the main methods used by companies to value their stocks, and are not really suited for use by the average investor. The whole process can be simplified for the amateur however, with the use of computer software programs that will do the hard work for you.

The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.