When you’re making an investment decision, the core of the process is determining what a given asset (or stock) is worth, and where you believe its value is headed. The goal is always to buy in at a value that’s promising, if not necessarily high, and sell when that value becomes strong. The tricky part is figuring out what a stock’s value actually is at a given point, beyond its listed market price. In this piece, we’ll look at a few tips for how you can see beyond price and determine what an asset is actually worth to you.
1 – Understand Intrinsic Value
Market price is easy to understand, but getting a feel for what else could constitute value can take a little bit of getting used to. Many consider the intrinsic value of a stock to represent its “true” worth. But what is the intrinsic value, exactly? Unfortunately, it doesn’t really have a precise or comprehensive definition, but the idea is that intrinsic value considers a company’s intangible assets and growth potential, rather than its dollar price on a given day. Brand recognition and loyalty, forthcoming products or services, projected earnings, and sector growth are all examples of intangible factors that can impact the “true” value of an asset.
2 – Research The Company’s Standing
It’s easy enough to look at a highly priced stock and assume that the company behind it is doing well. But that’s just not always the case. An article examining questions to ask before buying a stock made a few great points as to why it’s not the case, recommending that investors check a company’s balance sheet and review its earnings history and outlook before buying in. That’s a lot more work than just trying to analyze stock charts, identify favorable trading patterns, and keep one ear turned toward recent and relevant news. However, it’s necessary work. Studying history can tell you if the company tends to grow steadily or go through volatile swings, while checking the balance sheet can tell you if the company has problematic debts or increasing inventory, which could indicate lagging sales. These are things that don’t necessarily show up immediate
ly in market value, but that affect long-term potential.
3 – Learn The Ratios To Find Value Stocks
Rest assured, investors have long since figured out that market price is not synonymous with value, and they’ve come up with numerous ways to measure a closer approximation of what true value might be. The most popular method is the P/E ratio (Price/Earnings), which is quite simply a stock’s listed price divided by its annual earnings per share. Generally speaking, a low P/E might indicate either a weak asset or one with significant growth potential, and a high P/E indicates either a very strong stock or one that’s priced too high. There are no definite answers to be found, and there are some drawbacks to using P/E. For instance, the ratio often considers past earnings rather than future estimated earnings, and even when looking forward, estimated earnings are effectively educated guesses. However, P/E is still considered to be a better means of estimating true value than
simply looking at the price, and it can make for a nice starting point in evaluating a stock.
These tips don’t tell the whole story, but they’ll certainly help you to gain a broader and more helpful picture of any stock market asset you may be considering.