Valuation of an action – What it is, definition and concept

The valuation of a stock is the process by which an investor analyzes the shares of a company to obtain information about them. Based on this evaluation, the investor will choose to buy, sell or not carry out any operation with the shares.

The valuation of a share is, in other words, simply the study of the same (share) to know in depth the data that will make its price fluctuate.

In the investment world there are many types of assets that investors can decide to buy. In this article we will focus on stocks and their valuation.

When someone decides to invest in stocks, they must carry out a careful analysis of the different companies that are interesting to them, in order to choose the best option. The best option or options are not more than those companies that the investor considers that they are going to revalue considerably.

The revaluation is a determining factor since it is what will make the investor earn or lose money with the operation carried out. Therefore, it is very important to value stocks and identify which ones are most likely to increase in value.

It is important to note that, after carrying out the valuation of the share, the investor must rely on the conclusions obtained to make the decision to buy or not to carry out the operation. It is also true that when an investor already owns shares in a company, he must carry out a periodic assessment to find out if it is time to sell or keep said investment.

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For the valuation of a share you can follow three methods that we will explain below.

Methods for the valuation of a share

There are three methods for valuing a share:

  • Cash flows: This method allows the investor to know if a company is solvent or if it has problems facing its debts. Cash flow is the result of subtracting expenses from income. Through the cash flows, estimates can be made to know what the state of the company will be in the future.
  • Patrimonial value: This method makes use of the information provided by the company’s balance sheet to draw conclusions about whether the company’s shares may be a good or bad investment. We must bear in mind that the balance sheet provides information about a specific moment, the year-end.
  • Stock market ratios: In our article on stock market ratios you have all the information about these very important ratios when valuing a stock. Stock market ratios are the relationships between different variables of a publicly traded company. These variables are related to the asset price and the company’s accounting.

In conclusion, the valuation of a stock is the process through which an investor analyzes the shares of a company to determine if it can be an interesting investment. It is a very important process since, if mistakes are made, the investor can lose money.

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