Methods for valuing shares

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Correct forecasting of the potential of shares is a direct guarantee of their profitability. If there is no confidence in your own valuation skills, then you should entrust this business to professional market participants. Their experience and knowledge will help you invest correctly and increase your funds.

Stock valuation methods: for investors and issuers

Analysis of the potential of securities is carried out when investing in enterprises. The level of payback and dividends depends on the correct assessment. The evaluation reveals the investment potential of the company, the optimal time for buying and selling.

Basic concepts

The company issues shares to receive additional income from their sales. For this purpose, shares are valued. At the same time, their liquidity and the level of expected income depend on the prospects and growth rates of the enterprise. Most promotions do not have a specific expiration date. But the minimum validity period must be at least one year. By default, they are valid as long as the issuing company is doing business.

There are two types: simple and privileged. Ordinary shares are differentthe following properties:

1. After their purchase, the owner gets the right to participate in the meeting of shareholders, to vote for certain decisions.
2. Share payments are made after preference shares are paid.
3. Common shares are divided into classes A and B. The first type has priority in the order of payments.

Factors affecting pricing

The valuation of stocks depends on such leading factors as supply and demand. The optimal price is the price that buyers are willing to pay. However, this method may not be objective. The reason for this is other, external factors.

According to experts, the shares of Russian companies on the securities market are sold at very low prices. The reason for this is political instability, the uncertainty of the prospects for individual industries and sanctions against the country. This leads to the fact that investors are in no hurry to invest. When evaluating the value of shares, these factors are carefully analyzed.

Liquidity

Estimating the value of shares requires taking into account liquidity now and in the future. Liquidity should be understood as the ability to sell them at any time. According to this criterion, shares are divided into three tiers.

• "Blue chips" are shares of leading companies, monopolists. They have a stable rating, good prospects, which eliminates big risks. Most investors try to invest in blue chips.
• Secondechelon includes companies with good potential. Specialists clearly see their prospects. From a financial point of view, they have positive forecasts. Despite the higher level of risk, such companies also have investment attractiveness.
• On the third tier are companies that have recently entered the market. Their prospects are unknown. Deposits are the riskiest.

Thus, it should not be overlooked that market conditions are also one of the leading factors in valuing stocks.

Evaluation approaches

Despite the complexity of stock market theory, experienced investors can predict stock returns with mathematical precision. But at the same time, most novice investors make the mistake of investing by betting on stocks of companies that have been listed on the market for several years in a row. This raises the need for a more detailed study of assessment methods, regardless of current conditions.

From this point of view, there are two types of evaluation: technical and fundamental analysis.

Fundamental analysis

If you follow the principles of fundamental analysis, then the investor needs to study all available information about the company. Everything is subjected to analysis: accounting reports, tax system, production technologies, material and technical base, planned projects of the company, position in the market. Do not overlook the trends in the industry in which the company specializes, management strategiesregarding innovations in the industry and not only. If, as a result of such an analysis, it turns out that the company has potential, then a decision is made to purchase shares.

Technical analysis

The important question is when to buy shares. As mentioned above, stocks at the peak of relevance tend to decline in quotes. There is a need to calculate the exact time of purchases and sales. Technical analysis will help with this. It is carried out by studying the graph of growth in the popularity of the stock. The optimal moment is considered to be the period when the value of shares decreases and approaches a certain mark, in the language of stock market players, a support line.

When selling, you should also refer to the chart. If the value rises and approaches the peak, then the shares should be sold.

But such a policy is more inherent in market speculators. Regardless of the real potential of the stock, they sell when there is demand and buy when there is supply.

Which assessment methods are preferred?

The methods used to value shares depend on the purpose of the valuation. There are interests of two parties here: the investor and the issuing company. The first is the return on stocks. The second side is interested in raising additional funds not only for current activities, but also, possibly, for future projects.

In addition, the evaluation of shares is carried out during the restructuring of an enterprise, when making transactions, to obtain a loan from a bank, to transfer a block of shares to third partiespersons and mainly to demonstrate the prospects of the company.

In all cases, the assessment of the market value of shares is carried out by 5 methods. They are as follows:

1. Rated. The value of shares under this method should be equal to 25% of the authorized capital or less. The amount must be the same for each share. The total amount of issued shares at a given value should not exceed the amount of the authorized capital.
2. Market method. The cost of this method will differ from the previous coefficient. Here the focus is on supply and demand. If the company is stable, then the valuation of the shares will give it favorable prospects. Conversely, when the company's position is unstable, the shares are cheaper.
3. Balance value. The coefficient will be known if you take the amount of net assets and divide by the number of shares. This method is applicable when there is a merger of companies.

An interesting practical point: in the West, companies are valued higher than their accounting figures. In Russia, the opposite is true – the leading factor is financial performance. This is due to the lack of information to apply other methods.

1. Evaluation of the value of shares by the liquidation method. Applies the residual principle. Dividends will be accrued after the company sells assets at a favorable price, settles accounts with counterparties and pays for preferred shares. Here, the decisive factor for the profitability of the shares is the liquidation amount of the company. Shouldtake into account that the procedure for settlements with affiliated companies and persons is established by law. In this list, shareholders do not occupy the first role, which creates certain risks for the investor.
2. The investment method involves a benchmark for the cost that the investor considers optimal. But his assessment should not be unfounded. He must justify such a cost and provide the results of the analysis and other arguments.

Which method should I choose?

Evaluation of the company's shares, in particular, the method of evaluation depends on the quotes on the market. If quotes are at or near their peak, then a weighted average should be calculated as of the valuation date. In the opposite case, when stocks perform poorly, it is much more difficult to evaluate. In such cases, it is not the valuation of the enterprise's stock that becomes relevant, but the determination of the value of the entire enterprise.

Please note that these methods are not exhaustive. In addition, there are ways in which financial indicators play a major role.

Estimation of the value of the block of shares with such methods will be as follows:

• Calculating the value of net assets in circulation.
• Capital market analysis.
• Discounting financial flows.
• Mathematical weighing.
• Capitalization of income.

Practical application of methods

The liquidity cycle of stocks can vary from a few months to several years. In order not to remain at a loss from investment activities, you should bet on stocks with long periods. So there are twogood arguments:

1. There are fewer speculators in the long run, rates can be predicted with higher accuracy.
2. Due to stable growth, they bring more profit. From this point of view, some shareholders hold them up to half a century.

How profitable is it to invest in stocks?

The investor is absolutely free in his preferences, even if the valuation of the block of shares promises positive results. Shares of Western developing companies are popular among Russian investors. This is due to their stability.

The same picture is in the West, only with the orientation, on the contrary, to Russia. It is believed that Russian companies bring more profit in the short term. This trend allows them to invest significant amounts in domestic enterprises.

Given the fact that the stock market requires deep knowledge, practical experience and many other conditions, some investors do not risk doing stock valuation on their own. They transfer funds to trust management or operate through special funds.

Stock Management

By default, the purpose of buying shares is clear - making a profit. But one of the main laws of investing says - you should not invest all your money in the shares of one company. This approach is due to risks that do not depend on either the investor or the issuing company.

After the valuation of the company's shares, the classic strategy is applied. Her main criteria are:

• If the purpose of investing is the safety of funds, then you should bet on the "blue chips". Their number is not limited. Optimal - from 3 to 5, depending on the total amount of investment.
• If an investor is willing to take risks for the sake of higher returns, then you should look at stocks from the second and third tiers. The proportions are as follows: 50% - to the "blue chips", the remaining 50% should be distributed between the second and third tiers.

With this approach, the investor is insured against big losses: if the third tier did not live up to forecasts, then the second one can compensate for the losses.

Conclusion

The securities market as a separate branch of the economy has been formed for a long time. If earlier only certain persons with special training and in the appropriate economic environment had access to it, now everyone has access. This is helped by information technology, the development of the Internet and the availability of information. Thanks to them, the market valuation of shares and further transactions with it are available even to novice investors.

The input amount in the investment market is not controlled by anyone. Depending on their own capabilities, each trader or investor has the right to risk any amount convenient for him.