April 13, 2015
John Triplett, CPA
A primary “goal for management is to maximize the current value of the firm’s stock” (Parrino, Kidwell, Bates, 2012, pg. 12). As a result, understanding the true value of stock is beneficial. Stock valuation is important to identify which stocks are more desirable and will maximize wealth. Since stock has an effect on business and one’s own portfolio, valuing stock is critical. Several methods to value stock exist however; there is no best method for this valuation. Each stock contains its own characteristics to analyze based on the company issuing it. One must analyze the business and stock to find the ideal stock valuation method. By comparing the market price of stock to the realized value in the stock valuation, one can determine whether a certain stock is the optimal choice. The stock market is typically used for the trading of stocks that are listed and available for the public to buy or sell. These stocks are a part of shared capital in a specific company. As such, it gives the investor the power to own and make decisions regarding the company’s operations. In return the management ensures that they increase the value of the capital investments through different strategies that maximize profits. The success of this strategy will create a surge in demand of a particular stock increasing the market price while the contrary will create a decline in the market price value. The commonly used analysis by both the market and investors to understand or rate a stock is the price/earnings, or PE, ratio. It exemplifies the current price of a stock divided by a company earned for every share outstanding over the past year. When the PE ratio rises above the benchmark level, the investors are optimistic of the company’s earnings per share to rise. However, a low P/E ratio often means the market expects earnings to fall, which could trigger a decline in the stock...
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