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    How To Choose The Best Stock Valuation Method

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    Jonhmark Aniñon
    There are two main categories of stock valuation methods: absolute and relative valuation. Absolute methods try to determine a stock's intrinsic value based only on its own financials, while relative methods compare financial ratios of a stock to similar companies. The document discusses several common valuation models, including the dividend discount model (DDM) for valuing stocks of companies that pay stable, predictable dividends, and the discounted cash flow (DCF) model for valuing growth companies. Investors should choose methods based on a stock's characteristics and industry and sometimes use multiple methods to estimate value.

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    How To Choose The Best Stock Valuation Method

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    Jonhmark Aniñon
    23 views3 pages
    There are two main categories of stock valuation methods: absolute and relative valuation. Absolute methods try to determine a stock's intrinsic value based only on its own financials, while relative methods compare financial ratios of a stock to similar companies. The document discusses several common valuation models, including the dividend discount model (DDM) for valuing stocks of companies that pay stable, predictable dividends, and the discounted cash flow (DCF) model for valuing growth companies. Investors should choose methods based on a stock's characteristics and industry and sometimes use multiple methods to estimate value.

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    How to Choose the Best Stock Valuation Method

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    There are two main categories of stock valuation methods: absolute and relative valuation. Absolute methods try to determine a stock's intrinsic value based only on its own financials, while relative methods compare financial ratios of a stock to similar companies. The document discusses several common valuation models, including the dividend discount model (DDM) for valuing stocks of companies that pay stable, predictable dividends, and the discounted cash flow (DCF) model for valuing growth companies. Investors should choose methods based on a stock's characteristics and industry and sometimes use multiple methods to estimate value.

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    Download as docx, pdf, or txt
    23 views3 pages

    How To Choose The Best Stock Valuation Method

    Uploaded by

    Jonhmark Aniñon
    There are two main categories of stock valuation methods: absolute and relative valuation. Absolute methods try to determine a stock's intrinsic value based only on its own financials, while relative methods compare financial ratios of a stock to similar companies. The document discusses several common valuation models, including the dividend discount model (DDM) for valuing stocks of companies that pay stable, predictable dividends, and the discounted cash flow (DCF) model for valuing growth companies. Investors should choose methods based on a stock's characteristics and industry and sometimes use multiple methods to estimate value.

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    How to Choose the Best Stock Valuation

    Method
     FACEBOOK

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    By 
    JOSEPH NGUYEN
     
     
    Updated Jan 8, 2021
    TABLE OF CONTENTS

     2 Categories of Valuation Models


     Dividend Discount Model (DDM)
     Discounted Cash Flow Model (DCF)
     The Comparables Model
     The Bottom Line

    When deciding which valuation method to use to value a stock for the first time,
    it's easy to become overwhelmed by the number of valuation techniques
    available to investors. There are valuation methods that are fairly straightforward,
    while others are more involved and complicated. 

    Unfortunately, there's no one method that's best suited for every situation. Each
    stock is different, and each industry or sector has unique characteristics that may
    require multiple valuation methods. In this article, we'll explore the most common
    valuation methods and when to use them.

    KEY TAKEAWAYS

     There are several methods for valuing a company or its stock, each with its
    own strengths and weaknesses.
     Some models try to pin down a company's intrinsic value based on its own
    financial statements and projects, while others look to relative valuation
    against peers.
     For companies that pay dividends, a discount model like the Gordon
    growth model is often simple and fairly reliable—but many companies do
    not pay dividends.
     Often, a multiples approach may be employed to make comparative
    evaluations of a company's value in the market against its competitors or
    broader market.
     When choosing a valuation method, make sure it is appropriate for the firm
    you're analyzing, and if more than one is suitable use both to arrive at a
    better estimate.
    Volume 75%
     
    1:40

    How To Choose The Best Stock Valuation Method

    Two Categories of Valuation Models


    Valuation methods typically fall into two main categories: absolute valuation and
    relative valuation.

    Absolute Valuation
    Absolute valuation models attempt to find the intrinsic or "true" value of an
    investment based only on fundamentals. Looking at fundamentals simply means
    you would only focus on such things as dividends, cash flow, and the growth rate
    for a single company—and not worry about any other companies. Valuation
    models that fall into this category include the dividend discount model,
    discounted cash flow model, residual income model, and asset-based model.

    Relative Valuation
    Relative valuation models, in contrast, operate by comparing the company in
    question to other similar companies. These methods involve
    calculating multiples and ratios, such as the price-to-earnings (P/E) ratio, and
    comparing them to the multiples of similar companies. For example, if the P/E of
    a company is lower than the P/E of a comparable company, the original company
    might be considered undervalued. Typically, the relative valuation model is a lot
    easier and quicker to calculate than the absolute valuation model, which is why
    many investors and analysts begin their analysis with this model.

    Let's take a look at some of the more popular valuation methods available to
    investors, and see when it's appropriate to use each model. 

    Dividend Discount Model (DDM)


    The dividend discount model (DDM) is one of the most basic of the absolute
    valuation models. The dividend discount model calculates the "true" value of a
    firm based on the dividends the company pays its shareholders. The justification
    for using dividends to value a company is that dividends represent the actual
    cash flows going to the shareholder, so valuing the present value of these cash
    flows should give you a value for how much the shares should be worth.

    The first step is to determine if the company pays a dividend.

    The second step is to determine whether the dividend is stable and


    predictable since it's not enough for the company to just pay a dividend. The
    companies that pay stable and predictable dividends are typically mature blue
    chip companies in well-developed industries. These types of 

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