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.

Value a Stock

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This website was created in May 1999 byAlison Hirsch '01, and is maintained by Professor Satya Gabriel, of the Economics Department at Mount Holyoke College