Important Questions
  1. What do you mean by ‘valuation of stock’? 
   What are the objectives of stock valuation?
  2. What do you mean by ‘valuation of stock’? 
   Discuss  the  main  approaches  used  to 
   calculate the intrinsic value of shares.
  3. Discuss  briefly  the  fundamental  analysis 
   approach for valuation of stock.
  4. What is Price Earning ratio? How is this ratio 
   different from PEG ratio?
    Valuation of Stock - Meaning
  • Valuation  of  stock  means  to  calculate  the  fair  market 
   value or intrinsic value of stock by using some technique 
   or model.
  • This fair value or intrinsic value of the share is compared 
   with its market price or traded price.
  • If  Intrinsic  value  <  market  price,  it  means  share  is 
   overpriced.
  • If  Intrinsic  value  >  market  price,  it  means  share  is 
   underpriced.
  • Investments should not be made in overpriced shares.
  • An  investor  should  buy  underpriced  shares  and  sell 
   overpriced shares.
   Objectives of Valuation of Stock
  • Most important objective is  to  calculate  the 
   intrinsic/fair value of the share/stock. So that 
   the  investor  can  compare  it  with  its  market 
   price  and  decide  whether  to  invest  in  these 
   shares or not.
  • Second objective is to make prediction of the 
   future movement of price behaviour of shares. 
   So  that  the  investor  can  know  whether  the 
   stock is worth investing/holding or not.
   Approaches to Valuation of Stock
  • There are basically two main approaches/ 
   school of thoughts to valuation of stock or to 
   calculate the intrinsic value of shares:
   1. Fundamental Analysis Approach
   2. Technical Analysis Approach (will be covered 
     in next lecture)
       Fundamental Analysis Approach
     • Under this approach, valuation of stock is done 
       on the basis of the fundamental factors related 
       to  a  company  like  revenue,  dividends,  risk, 
       earning capacity of company etc.
     • Intrinsic value of share is calculated using various 
       methods/techniques devised on the basis of any 
       of   these  fundamental  factors  related  to 
       company/share.
     • Such  analysis  is  done  to  help  the  investor  in 
       taking investment decision.