Value The Stocks

VALUE THE STOCKS

Stocks or shares, is not only a piece of paper nor the numbers in your screen. Stocks or shares is representing a real ownership stakes of the company. Of course that the real ownership of the company is based on the number of shares being held and it divided by the number of shares outstanding. Though many kind of shares in the market, but here we are discussing on the shares that exchange in the stock market.

Stock Market is the aggregation of buyers and sellers where the regular activities of buying, selling and issuance of shares of publicly held companies take place. If one says that he trades in the stock market, it means that he buys and sells shares/equity on one (or more) of the stock exchange(s) that are part of the overall stock market. Stock market in Indonesia is Indonesia Stock Exchange (Bursa Efek Indonesia) other Leading stock exchanges of the world include the New York Stock Exchange (NYSE), Nasdaq, NIKKEI, Euronext, FTSE, DAX etc.

A newbie investor that want to jump in stock market must learn a few valuable skills, otherwise instead of profit, they will deep in loss. The basic and the most important thing is how to value the stocks. In the stock market, there are a lot of noise in the background, rumor and issues sometimes impacting the investors for buying or selling the stocks. Without the knowledge of how to value the stock, the investor will have affected from background noises that is not needed. To value the stock, the investor need to have a strong foundation to determine a stocks true intrinsic value. By proper strong foundation of valuing the stocks, the investor can reduce the risk when estimating the future weather, the company’s stocks already over the value or company’s share are severally undervalued.

There are many instruments that investor can use for value the stocks. Though arguable, but the most common instruments to value the stocks is by using P/B ratio, P/E ratio and Dividend Yield.

P/B Ratio

P/B ratio is Price to Book ratio. It’s a ratio that represent if the company being sold today. This ratio is important, because when the company that already matured falter in term of growth, but still have a good valued based on their assets. The book value usually includes, Land, Building and equipment. Not only physical value, anything that can be sold include in the book value, e.g. Bonds and stock holding exclude intangible assets (Patents or goodwill).

    P/B Ratio =  Market Price per Share
                 Book Value per Share

A lower P/B ratio could be mean that the stocks undervalued or perhaps there is something wrong in the company. P/B ratio is indicating whether you’re paying too much for what would remain if the company went bankrupt immediately.

The “good” P/B value its vary based on the industry, good P/B value in one industry could be a poor ratio for other industry.

P/E Ratio

P/E Ratio is Price to Earnings ratio. This formula is dividing the price of the shares in the market by Earning Per Shares (EPS). The lower the P/E ratio, the more earnings power investors are buying with each share.

                        P/E ratio = Market Price per Share
                                      Earnings Per Share

Unfortunately, just like the P/B ratio, there is no standard or Mendoza line in which value the P/E ratio is good to buy or good to sell. The greater the difference between the stock’s intrinsic value and its current price, also known as the margin of safety, the more likely a value investor will consider the stock a worthy investment. A high P/E could mean that a stock’s price is high relative to earnings and possibly overvalued. Conversely, a low P/E might indicate that the current stock price is low relative to earnings. P/E ratio also used by the investor for comparing value of company’s shares apples to apples. This also useful for comparing current earnings to future earnings and helps provide a clearer picture of what earnings will look like – without changes and other accounting adjustments.

Dividend Yield

 In the uncertainty market, even though we already have strong fundamental and strong analysis of the market, but anything can be happened. There is a time when the stocks go falters. This is why dividend –paying stocks are attractive to the investor, even when the price drop you still get the pay-check.

The formula for dividend yield is:

                     Dividend Yield  = Annual Dividend
                                     Current StockPrice

Dividend Yield is one of the signal of the company stability. In normal condition, only company that have profit will pay the dividend. Therefore, investor often seek the company that pay significant amount of the dividend for an extend period of time as safer investment.

Summary

There are many uncertainty condition in the stock market, therefore the way we value the stock is important. Even though we already have good fundamental but what we can do is minimising the risk. As explained in this article, for analysing the market, we cannot use only single instrument. We need to compare other instrument and comparing the company with it closed rival, so we can have better understanding in predicting the future. Happy Trading….(AJI)

Source :

 Brealey/Myers/Allen. Principles of Corporate Finance 12^th Edition. New York: McGraw-Hill, 2017

https://en.wikipedia.org/wiki/Stock_market. Feb 1,  2019

Cochrane, Mathew. https://www.fool.com/investing/2018/05/13/the-definitive-guide-how-to-value-a-stock.aspx. May 13, 2018

https://www.investopedia.com/terms/p/price-earningsratio.asp. Jan 29, 2019

https://investinganswers.com/financial-dictionary/income-dividends/dividend-yield-361. 2019

About Post Author

aji

Working and travelling to rural area in Indonesia, to give access for the people to electricity and to improve their quality of life..

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aji

Working and travelling to rural area in Indonesia, to give access for the people to electricity and to improve their quality of life..