Stock Market Valuation

---

How does investors decide  share market

The price of a firm’s stock represents the value of the firm per share of stock:

Share /stock price=  value of the firm /number of share,

• Stock does not always indicate the firms.
• The return on the investment is determined by dividends received and the price of the stock from the time when they purchased the shares until they sell them

Return on the investment is decided by the dividend received & the price of the stock from the time they are purchased the share till the time they are sold.

Here is one example : company DCW Ltd

NSE    15.40 0.90 (6.21%)

BSE    15.45 0.98 (6.77%)

Open 14.25 Previous Close 14.50 Day's Range 14.2 - 15.5 EPS 1.46 Avg Volume(10 days) 370104 Price / Earnings 10.53 52 Week Range  26.80 - 11.15

Market Cap 323.08 Cr. Equity Shares 0.94 Cr. Divd Payable 22-09-2012/28-09-2012 Divd Yield 2.34 Declared Divd % 18.00 Ex - Divd Date 20/09/2012

Stock Valuation Methods:-

The price-earnings (PE) method means PE ratio based on expected earnings of all traded competitors to the firm’s expected earnings for the next year.

• Assumes future earnings are an important determinant of a firm’s value.
•  Assumes that the growth in earnings in future years will be similar to that of the industry.

Reasons for different valuations:-

• Investors may use different forecasts for the firm’s earnings or the mean industry earnings.
•  Investors disagree on the proper measure of earnings.

Limitations of the PE method:-

• May result in inaccurate valuation for a firm if errors are made in forecasting future earnings or in choosing the industry composite .
• Some question whether an investor should trust a PE ratio 

Valuing A Stock Using the PE Method:-

A firm is expected to generate earnings of Rs 110 per share next year. The mean ratio of share price to expected earnings of competitors in the same industry is 14. Then the valuation of the share as per PE method is calculated as below.

Valuation per share = (Expected earnings of firm per share) × (Mean industry PE ratio)

                                 = 110 × 14 = 1540 Rs

Stock Quotation:-

• 52-week price range (high/low and YTD% change)
• Stock symbol
• Dividend annualized and dividend yield
• Price-earnings ratio
• Volume in round lots
• Previous day’s price close and net daily change
• Remainders in cents, not eighths

How investor decisions affect the stock price:-

• Investors buy or sell shares based on their valuation of the stock relative to the prevailing market price.
• Investors arrive at different valuations which means there will be buyers and sellers at a given point in time.
• As investors change their valuations of a stock, there is a shift in the demand for and supply of shares and the equilibrium price changes.
• Investor reliance on information.
• Favourable news increases the demand for and reduces the supply of the security.
• Unfavourable news reduces the demand for and increases the supply of the security.
• Investors continually respond to new information in their attempt to purchase or sell stocks.

Globalization of Stock Markets:-

• Barriers between countries have been reduced.
• Firms can tap foreign markets funds are needed.
• Investors can purchase foreign stocks.
•  Foreign stock offerings in the U.S.
• Large privatization programs in Latin America and Europe can not be digested in local markets.
• By issuing stock in the U.S., foreign firms diversify their shareholder base.
• SEC regulations may prevent some firms from offering stock in the U.S.
• Some foreign firms use American depository receipts (ADRs).
• Many U.S. investment banks and commercial banks provide underwriting services in foreign countries.
• Listing on a foreign stock exchange:-

1. Enhances the liquidity of the stock.

2. May increase the firm’s perceived financial standing.

3. Can protect the firm against hostile takeovers.

4. Entails some costs