When you invest in company stock, you acquire a potentially income-producing asset. Stock can make you money in two ways -- through the issuance of dividends, and through capital gains you will realize if you sell the stock for more than you paid for it. Before purchasing a stock, it is important to calculate the value of a stock and compare it to its market price, so you can decide whether it's worth purchasing. Unfortunately, there is no infallible way to determine a stock's true value.
1. Examine the company's most recent financial records to determine the date for which you wish to perform the calculation. Unless you are already a shareholder or are a company insider, the most recent information you are likely to have access to is company financial statements issued for the most recent quarter. If the company is publicly traded, these will be filed with the Securities and Exchange Commission and can be found online on its EDGAR database.
2. Locate the company's net income from its most recently issued income statement. Net income equals total revenue minus total expenses, and is listed as a separate item on the balance sheet.
3. Subtract any dividends paid on the company's preferred shares. This information is located on the statement of changes in shareholders' equity.
4. Find the company's average number of shares outstanding in the "Capital Stock" section of the company's balance sheet.
5. Divide the remainder you arrived at in Step 3 by the average number of shares outstanding. This will give you a dollar value that represents the market price per share of common stock.
- To purchase stock in a corporation whose shares are not publicly traded, you must qualify as an "accredited investor" as defined by Regulation D issued by the SEC. This definition includes company insiders, institutional investors and wealthy individuals.
- If the current trading price for the stock is lower than your valuation, the stock is likely to be a bargain. If it is higher, the stock is likely overpriced. However, other factors, such as the company's future prospects, could turn out to be a more important indicator of the stock's true value in the long run.
- U.S. Securities and Exchange Commission: Beginners' Guide to Financial Statements
- AccountingCoach: What is the Book Value Per Share of Stock?
- "Business Ratios and Formulas: A Comprehensive Guide"; Steven M. Bragg; 2006
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