Corporate Finance Basics
Why Value Stocks?
Knowing the value of a preferred or common share of a stock is
important not only for portfolio managers, but for anyone who may wish to
invest in this type of security. An investor must know the intrinsic value
of a stock in order to decide whether or not to invest in it. Once the
intrinsic or fair value of a stock is found, the
investor can check its current market price and determine whether or
not the stock price is overvalued or undervalued. Assuming all stock
prices will eventually reach fair value (whether the current price is
above or below), knowing the fair value of the stock is
extremely important. If a valuation is not done, the investor will not
know if she has used her money wisely.
In order to effectively value a stock, the investor must decide what
factors are important to her. For example, is a quick, large return
important? Is risk important? Is a paid dividend important? Each investor
has a unique
reason for putting her money into stocks, and when evaluating stocks, she
must prioritize her needs.