Correct forecasting of stock potential is a direct guarantee of their profitability. If you are not confident in your own assessment skills, then you should entrust this matter to professional market participants. Their experience and knowledge will help to properly invest and increase funds.
Valuation methods: for investors and for issuing parties
An analysis of the potential of securities is carried out when investing in enterprises. The level of payback and dividends depends on the correct assessment. When assessing, the investment potential of the company is identified, the optimal time for buying and selling.
Basic concepts
The company issues shares to generate additional income from their sales. To this end, stock valuation is carried out. At the same time, their liquidity and the level of expected income depends on the prospects and growth rates of the enterprise. Most stocks do not have a specific validity period. But the minimum validity period must be at least one year. By default, they are valid as long as the issuing company conducts entrepreneurial activities.
Two types are distinguished: simple and privileged. Common shares differ in the following properties:
- After their purchase, the owner receives the right to participate in the meeting of shareholders, to vote for certain decisions.
- Payments on shares are made after payments on preferred shares are made.
- Between themselves, ordinary shares are divided into classes A and B. The first type has advantages in the payment order.
Factors Affecting Value Determination
Valuation of stocks depends on such leading factors as supply and demand. The optimal price is what buyers are willing to pay. However, this method may not be objective. The reason for this is other, external factors.
According to experts, the shares of Russian companies in the securities market are sold at very low prices. The reason for this is political instability, unclear prospects for individual industries and sanctions against the country. This leads to the fact that investors are in no hurry to invest. In assessing the value of shares, these factors are carefully analyzed.
Liquidity
Valuation of shares requires accounting for liquidity at the current time and in the future. Liquidity should be understood as the ability to sell them at any time. According to this criterion, shares are divided into three echelons.
- Blue Chips are shares of leading companies, monopolists. They have a stable rating, good prospects, which eliminates big risks. Most investors try to invest in blue chips.
- The second tier includes companies with good potential. Specialists clearly see their prospects. From a financial point of view, they have positive forecasts. Despite a higher level of risk, such companies also have an investment attractiveness.
- In the third tier are companies that have recently started to operate in the market. Their prospects are unknown. Deposits are the most risky.
Thus, one should not lose sight of the fact that market conditions are also one of the leading factors in valuing stocks.
Assessment Approaches
Despite the complexity of the theory of the stock market, experienced investors can pre-calculate stock returns with mathematical precision. But at the same time, most novice investors are mistaken in investing, betting on shares of companies that have been quoted on the market for several years in a row. Here the need arises for a more detailed study of assessment methods, regardless of current conditions.
From this point of view, two types of assessment are distinguished: technical and fundamental analysis.
Fundamental analysis
If you follow the principles of fundamental analysis, then the investor needs to study all available information about the company. Everything is subjected to analysis: accounting reports, tax system, production technologies, material and technical base, planned projects of the company, market position. Do not lose sight of the trends of the industry in which the company specializes, management strategies regarding innovations in the industry and not only. If, as a result of such an analysis, it turns out that the company has potential, then a decision is made on the purchase of shares.
Technical analysis
An important question is at what point to buy stocks. As mentioned above, stocks at the peak of relevance tend to decline in quotes. There is a need to calculate the exact time of purchases and sales. This will help technical analysis. It is carried out by studying the graph of growth in popularity of the stock. The optimal moment is the period when the value of the shares decreases and approaches a certain mark, in the language of the stock market players, by the support line.
When selling, you should also refer to the schedule. If the price rises and approaches a peak, then shares should be sold.
But such a policy is more inherent in market speculators. Regardless of the real potential of the shares, they sell them when there is demand, and buy when the offer is relevant.
What assessment methods are preferred?
The stock valuation methods used depend on the purpose of the valuation. Here are the interests of two parties: the investor and the issuing company. The first is interested in stock returns. The second side is interested in attracting additional funds not only in current activities, but also possibly in future projects.
In addition, the valuation of shares is carried out during the restructuring of the enterprise, when making transactions, to obtain a loan from a bank, to transfer a block of shares to third parties and mainly to demonstrate the company's prospects.
In all cases, the market value of shares is estimated using 5 methods. They are as follows:
- Nominal. The cost of shares with this method should be equal to 25% of the share capital or less. At the same time, for each stock the amount should be the same. The total amount of issued shares at a given value shall not exceed the amount of the authorized capital.
- Market method. The cost of this method will differ from the previous coefficient. Here the guideline makes supply and demand. If the company is stable, then the valuation of the shares will give it favorable prospects. Conversely, with an unstable company, stocks are cheaper.
- Book value. The coefficient will become known if you take the amount of net assets and divide by the number of shares. This method is applicable when a merger is due.
An interesting practical point: in the West, companies are rated higher than their accounting indicators. In Russia, the opposite is true - the leading factor is financial performance. This is due to the lack of information for using other methods.
- Valuation of shares using the liquidation method. Applies the residual principle. Dividends will be accrued after the company sells assets at a bargain price, settles accounts with counterparties and pays on preferred shares. Here, the decisive factor for the profitability of shares is the liquidation amount of the enterprise. It should be noted that the procedure for settlements with affiliated companies and persons is established by law. In this list, shareholders do not take the first role, which creates certain risks for the investor.
- The investment method involves a guide to the value that the investor considers optimal. But his assessment should not be unfounded. He must justify such a cost and give the results of the analysis and other arguments.
Which method to choose?
Valuation of a company's stock, in particular, the valuation method depends on market quotes. If the quotes are at or near the peak, then you should calculate the weighted average amount at the date of the assessment. In the opposite case, when the stocks are low, it is much more difficult to make an assessment. In such cases, it becomes relevant not to evaluate the stock of an enterprise, but to determine the value of the entire enterprise.
Keep in mind that these methods are not exhaustive. In addition, there are ways in which financial performance indicators play a major role.
The assessment of the value of a block of shares with such methods will be as follows:
- Calculation of the value of net assets in circulation.
- Capital market analysis.
- Discounting financial flows.
- Mathematical weighing.
- Capitalization of income.
Practical application of methods
The liquidity cycle of stocks can vary from several months to several years. In order not to remain at a loss from investing activities, you should bet on stocks with long maturities. There are two compelling arguments for this:
- In the long run, fewer speculators participate; courses can be predicted with higher accuracy.
- Thanks to stable growth, they bring more profit. From this point of view, some shareholders hold them for half a century.
How to invest in stocks?
The investor is absolutely free in his preferences, even if the assessment of the block of shares promises positive results. Among Russian investors, shares of Western developing companies are popular. This is due to their stability.
The same picture is in the west, but with an orientation, on the contrary, to Russia. It is believed that Russian companies bring more profit in the short term. This trend allows them to invest significant amounts in domestic enterprises.
Given the fact that the stock market requires deep knowledge, practical experience and many other conditions, some investors do not risk independently evaluating stocks. They transfer funds to trust or operate through special funds.
Stock management
By default, the purpose of buying shares is clear - making a profit. But one of the main laws of investing is that you should not invest all funds in the shares of one company. This approach is caused by risks that are independent of either the investor or the issuing company.
Once the stock has been valued, the classic strategy is applied. Its main criteria are as follows:
- If the purpose of investing is to preserve funds, then you should bet on "blue chips". Their number is not limited. Optimal - from 3 to 5, depending on the total amount of investment.
- If an investor is willing to take risks to get higher returns, then you should take a closer look at stocks from the second and third tier. The proportions are as follows: 50% - in the blue chips, the remaining 50% should be distributed between the second and third echelons.
With this approach, the investor is safe from big losses: if the third tier did not live up to forecasts, the second can compensate for losses.
Conclusion
The securities market as a separate branch of the economy has long been formed. Previously, only certain persons with special training and in the appropriate economic environment had access to it, now everyone has access. This is helped by information technology, the development of the Internet and the availability of information. Thanks to them, the market valuation of shares and further transactions with it are available even to novice investors.
The input amount to the investment market is not controlled by anyone. Depending on their own capabilities, each trader or investor has the right to risk any amount convenient for him.