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The Complete Idiot's Guide to Stock Investing Fast-Track by Ken Little

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Alternative to Discounted Cash Flow Method

What do you use if you don’t want to or can’t use the discounted cash flow method of valuing a stock? There are other methods for valuing a stock (not valuing the company). The most popular alternative uses various multiples to compare the price of one stock to a comparable stock. The price earnings ratio (P/E) is the most popular multiple for these comparisons.

The procedure is not unlike using comparables to appraise a house for sale. In that case, the real estate agent finds comparable houses in the area that have sold recently and uses that information to arrive at a price for your house. The idea is that comparable assets should sell for similar prices. The same process is used for stocks with the ...

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