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Concept
Stock valuation
Summary
In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and thus to profit from price movement – stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will overall rise in value, while overvalued stocks will generally decrease in value.
A target price is a price at which an analyst believes a stock to be fairly valued relative to its projected and historical earnings.
In the view of fundamental analysis, stock valuation based on fundamentals aims to give an estimate of the intrinsic value of a stock, based on predictions of the future cash flows and profitability of the business. Fundamental analysis may be replaced or augmented by market criteria – what the market will pay for the stock, disregarding intrinsic value. These can be combined as "predictions of future cash flows/profits (fundamental)", together with "what will the market pay for these profits?" These can be seen as "supply and demand" sides – what underlies the supply (of stock), and what drives the (market) demand for stock?
Stock valuation is distinct from business valuation, which is about calculating the economic value of an owner's interest in a business, used to determine the price interested parties would be willing to pay or receive to effect a sale of the business.
Re. valuation in cases where both parties are corporations, see under Mergers and acquisitions and Corporate finance.
There are many different ways to value stocks. The key is to take each approach into account while formulating an overall opinion of the stock. If the valuation of a company is lower or higher than other similar stocks, then the next step would be to determine the reasons.
The first approach, Fundamental analysis, is typically associated with investors and financial analysts - its output is used to justify stock prices.
Official source
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