What is Valuation?

The simple answer is that the valuation of a company or stock, is how much a company is thought to be worth, based on a variety of factors.

As a definition, this simple answer is fine. But when it comes to determining the actual value of a stock, not all valuation methodologies are created equal.

No single method applies to all companies or succeeds in all market conditions. The price of a security is based on several tangible and intangible factors: the current status of the company, the prospects for the company, market sentiment, economic or political environment, and many other factors.

Again, value refers to potential capital gain opportunities in the stock market. More obvious factors include strong balance sheets, good earnings growth, and low price-to-earnings ratios (P/Es). Other hidden values that go into a valuation could be real estate owned by the company, patents on intellectual property, or secondary revenue streams that could become more prominent sectors of business in the future.

But even within the investing industry, there is no hard and fast rule about the importance of valuation. Some professionals believe it’s essential to consider valuation and room for growth, then buying when valuation as compared to peers is reasonable.

For others, valuation is just one of many data points to look at. In fact, many of history’s biggest winners got going with huge valuations. The bottom line is that, if the growth is exciting enough (and the market is bullish), valuation doesn’t stand in the way of institutions piling in as the story unfolds.

As you can see, valuations are based on several influences, but it’s still up to the individual investor to decide if they believe the hype, or to the contrary, if they see an underdog who is going to spike. 

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