Stock Markets Exposed
How do you analyze a stock price to see what the value should be?
I am 12 and new to investing. So, for example Microsoft. What steps would I take to analyze that? It's at $29 per share. I have heard that you see what the cash flows are and something else. Please give a detailed methodoligy. Thanks.
Public Comments
- In the stock market, there are fundamentals, there are technicals, there are analyst estimates (rumours?) and there are emotions. The fundamental analysis (discounted cash flow and other valuation methods) determines the intrinsic (real) value of a share based on company's future prospects and past performance whereas the technical analysis predicts the fair share price through statistical analysis and charting techniques. Emotions, gossip and individual preferences determine demand and supply of a share in the market and determine the market price of the share. Then the investor compare the market price of a share with either its fundamental value or technical value or analyst estimates to determine whether the share is undervalued and overvalued. Ideally he should make the next trade based on this information i.e. sell if overvalued and buy if undervalued. But emotions, gossip, insider trading, and other factors may make an investor act otherwise. This is precisely the reason why the market price of a share may deviate from its intrinsic value. The moral of the story is that even though there are many ex-post theories to explain the price movements of a share, there's no robust theory to predict it, as the trade is made not by rational machines but by irrational humans.
- Hmm, a simple question with a VERY complex answer. You need to look at a host of things, both in the company and outside of it. Within the company: 1) Generally the debt to assets ratio will tell you the "fire sale" value of a company, if it was liquidated today. That is one measure to consider. 2) Value of debt relative to overall net profit. If the company/economy has a bad quarter/year then is the company still able to pay its debtors? Remember that if a company goes bankrupt, the holders of debt get paid FIRST, and the holders of stock a distant second, IF there is anything left. Outside the company: 1) What is the demand for its product, and what events are shaping that demand, and future demand? Here is some quick advice from a guy who I think has the best grasp on investing out of all the experts who I have read, a man named Warren Buffet: Is the company in an industry with good economics, i.e., not an industry competing on price. Does the company have a consumer monopoly or brand name that commands loyalty? Can any company with an abundance of resources compete successfully with the company? Are the Owner Earnings on an upward trend with good and consistent margins? Is the debt-to-equity ratio low or is the earnings-to-debt ratio high, i.e. can the company repay debt even in years when earnings are lower than average? Does the company have high and consistent Returns on Invested Capital? Does the company retain earnings for growth? The business should not have high maintenance cost of operations, high capital expenditure or investment cash outflow. This is not the same as investing to expand capacity. Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments? Is the company free to adjust prices for inflation? --------------------------------------- If you are looking to learn how to invest, get a book or two on basic accounting. This lets you understand the financial statements, i.e. Balance Sheet, Income Statement, Statement of Cash Flows. Also learn about about finance, and the Time Value of Money. If you want to value a company, you MUST learn how that value will change over time.
