Formula for Valuing Stocks

by Michael Wolfe

The easiest way to know what the value of a stock is to check it's most recent trading price on the market. However, there are more complicated formulas that investors can use with the intention of placing a value on the security. Some of these involve historical price data, while some involve other factors besides the stocks market price.

Historical Data

Some valuation formulas use the historical price of a stock to estimate its true value. This works best for stocks that have been around for a while and are low growth. For high-growth stocks, past indicators of performance are less effective. Generally, these formulas stick to a fairly short time line.

"Fair" Price

Some formulas equate the value of a stock with the so-called fair price of the company. These formulas have an almost infinite number of variations, all of which use data related to the revenue that the company has generated, its profits and the number of shares it has issued, among other data. These formulas, however, may diverge sharply from market sentiment, with the market undervaluing or overvaluing the stock due to a number of factors.

Prediction Models

Some models that attempt to determine the value of a stock use predictions about the future of the economy, including the sector in which the company is located, to estimate the company's future price. For example, an oil company may have its stocks valued higher if there are bullish indicators on the economy as a whole.

Considerations

All formulas for valuing stocks are only predictions. The results from these formulas are likely to have a different value for a stock than its current market price. You may have your idea of which stock is the most valuable, but your goal is ultimately to decide what the market will think of the stock.

References

  • Investing for Dummies; Eric Tyson

Photo Credits

  • Joe Raedle/Getty Images News/Getty Images