Investor Glossary-valuationInvestor Glossary-valuationInvestor Glossary-valuationInvestor Glossary-valuationInsightful stock market charts - Click here
investor
Categories    # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Valuation

The HTML to link to this page
 

Valuation is the attempt to determine whether a stock is fairly priced. According to financial theory, a stock should be valued at the future cash flows it will generate, discounted by an appropriate rate. But both future cash flows and an appropriate discount rate are highly uncertain, and thus investors seek additional valuation methods. The most common valuation method is the price earnings ratio (P/E), which is the price divided by earnings per share (EPS). But this valuation can miss the mark because of accounting vagaries and the time-span chosen for EPS. Moreover, an earnings-based valuation won't work for a new company with loads of promise but no profits as yet. Other recognized valuation methods are similarly useful, and similarly flawed. A valuation based on sales recognizes the firm's revenue-generating power -- but bankrupt firms too often have plenty of revenue. A valuation based on book value uses audited accounting figures, but historical asset values are often wrong. Thus investors tend to use a variety of valuation methods to decide whether the current stock price over- or undervalues a stock.



Rate this valuation definition...

Learn about investing with the Investor Glossary Term of the Day


Click here for insightful stock market charts. Where is the market headed? The answer may surprise you. Find out
with the exclusive & Barron's recommended charts of Chart of the Day.


Popular Terms: deferred revenue, FTSE, labor relations, debt service coverage, EBITDA, ex-dividend date, covered put, diluted share, LIBOR, Key Rate Duration, stock split, retained earnings, implied volatility, irrevocable trust, per diem, ex-dividend, 401a, balance sheet, Zero Cost Collar, reverse mortgage, in escrow, real GDP, open position, risk management, required rate of return, class C shares, stock market close, liquidity ratio, 1035 exchange, margin rate, quality assurance, limit order, dividends payable, FICO score, average price per share, option premium, phantom income, 144a, cancelled check, 1031 exchange, deferred tax, current ratio, annual return, wholly-owned subsidiary, APR, VIX, inflation, minority interest, command economy


Investor Glossary | Term of the Day | Suggest a Term | Chart of the Day | Dogs of the Dow
Investor Glossary Index >>> # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Accounting | Banking | Bonds | Brokers | Economy | Futures | Mutual Funds | Options | Real Estate | Retirement | Stocks | Taxes | Technical Analysis
©2004-2014 Investor Glossary - All rights reserved - Terms of Use