5. Analysis Tool #2: Valuation
How much is a stock worth?
If we knew, making money in the stock market would be a snap. All we would have to do is buy undervalued stocks and then sit back and wait for them to move up to their “correct value.” Of course, it’s not that easy. Unless they pay significant dividends, stocks are like baseball cards. They have no value other than what another investor is willing to pay.
That said, countless stock valuation schemes are in use. Many originated when investors did buy stocks mainly for the dividends. Then, it made sense to value stocks based on the present value of their future payouts. While many investors still buy stocks for the dividends, that’s a separate topic. For growth and value stock investing, ...