Many investors who have been in the stock market for quite a long period of time do not know how to select the best valuation method. This is because there are many valuation methods that one can choose from. This makes making the entire process quite complex. Unfortunately, each stock market is different and therefore requires a distinctive method.
The most commonly used valuation methods are divided into two categories: absolute and relative assessment techniques. The absolute system is usually based on fundamentals and therefore focuses on things such as dividends, the growth rate of a specific company and the cash flow. On the other hand, the relative valuation method basically operates by comparing a specific company to other companies that offer the same service.
Many people prefer the relative valuation method since it is considered to be very fast and easy to use. However, an individual is advised to use a method that best suits the characteristics of the company he/she is investing in.
If you are a new investor in the stock market, the first thing for you to do is to understand how the stock market works. After understanding how things work in the stock market, you will then proceed to choose the best valuation method that will help you determine the value of stock of the company you intend to buys shares/stock from. There are many valuation methods to choose from and they can help you establish whether a company is worth to be invested in.
The stock market valuation methods vary from one company to another. The method you can use to value a particular company can not be the most ideal method for you to use to value another company. It is, therefore, important for you to determine the best method to use to value the company you intend to invest in. The help of a financial adviser can be of great assistance when it comes to making the best choices in the stock market.
There are three main stock valuation methods. They are mostly applied but they have some limitations.
They are prone to errors. The first in first out method and last in first out methods are mostly prone to errors since one has to go through the records in order to record an issue or a receipt of the stock.
There is difficulty in comparing the tasks performed at different times. This is because these tasks may consume materials whose prices are different. This applies mostly when there are price fluctuations.
The first in first out method does not reflect the current market price. This is because the materials that are issued are the ones that were brought in first. The price may be higher or lower than the prevailing market price and thus leads to losses.
In the case of the last in first out method, many prices have to be adopted for a single requisition due to the changing market prices.