How To Value A Stock By Calculating Intrinsic Value

Stock investing is a proven strategy for securing your financial future well beyond your employment, superannuation and any other retirement funds you may invest in. In fact, stock market investing is essential for a secure financial future.

However, many people feel clueless about stock investments and how to get into stocks. In this post you will discover all of the fundamentals necessary for smart value investing that will help secure your financial future.

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If you know how and what kind of stocks to invest in you’ll know how you can secure your financial future. It’s a matter of education and informing yourself. If you educate and inform yourself then you will be in a solid position to make strong stock market investments.

That is what we will go through in this post. By the end of this post, you’ll know the fundamentals for smart stock market value investing.

How To Value A Stock By Calculating Intrinsic Value

Intrinsic value is one of the most important things to look at when deciding what companies to buy stocks from.

The intrinsic value of a company refers to the true value of the business in the market overall regardless of its current performance in the market. A business may be performing poorly in the stock market, but this doesn’t reflect the true value of that business.

This is why fundamental analysis is crucial to your ability to identify a fundamentally strong business and know when that company’s stock is undervalued.

A fundamental analysis of a business and their stock will allow you to determine how strong the business is by looking at different factors such as target market factors, their business model, management, net sales, and more.

This analysis will show you how to value a company and determine if their stocks are worth investing in or not.

However, you also need to perform an analysis on the individual stocks themselves. The most common method for valuing a stock’s performance is the Discounted Cash Flow method.

This method involves looking at the cash flow of a business and factoring in net income as well. It also works by subtracting changes in working capital and capital expenditures.

This method will successfully allow you to determine the intrinsic value of a company’s stock. Specifically, it will show you how the stock is performing but in relation to its intrinsic value, meaning it’s true overall value, not the one currently expressed by the market.

It will show you when the stock is undervalued so you will know when to buy, and it will show you when it’s overvalued so you can sell the stock for a profit.

How To Build A Value Investment Portfolio

Investment analysis and portfolio management is vital if you want to build a solid investment portfolio and one way to do that is via diversifying your stock investments.

A diversified portfolio is one of the most important investment strategies you need to use if you want to invest safely and securely.

It’s true that value stocks have the ability to reward you with the highest profits, but you should also be aware that only investing in value stocks is a foolish strategy.

There are many risks involved with only investing in value stocks because there is always the chance that the business you invest in could go bankrupt.

Even if it has a great history of performance, there is still always that chance. However, you can avoid that risk completely by something called diversifying your portfolio.

Diversification is essential if you want to succeed in stock market investing. It protects your investments because you are spreading your investments across multiple businesses and often in multiple industries.

This reduces the risk you’ll lose all of your investment if one of the business’ you invest in does go bankrupt because you’ll still have your investments in other businesses.

There are different methods of diversification and you should build a portfolio that includes Exchange Traded Funds (EFT’s), income stocks, index tracking funds and more.

You should be investing in value stocks just as we have explained how in this post, but you should also be diversifying your investments as well.

One of the most secure ways to do so is via an index-tracking fund. An index-tracking fund is a fund you invest in that contains in some cases hundreds of companies.

For example, you could pick an index tracker fund that contains the top 100 companies listed on the Dow Jones. This would mean when you are investing in this fund, that you are investing a little bit in all of the top 100 companies on the Dow Jones.

This is how your investment becomes diversified because if one of those companies goes bankrupt then you still have your investments in other companies.

Diversifying your investments is how to build a portfolio safely and securely.

Final Words

Value investing is a proven method of stock market investment and is the best way to ensure you are investing in stocks that will secure your future and give you a profit.

However, it’s important that you make educated decisions regarding your investments.

Often, you’ll hear people say that stock market investing is useless and that you’re gambling with your money by doing so.

It’s only ineffective if you first don’t do your research, educate yourself, and study everything required to be a successful stock market investor.

This is the best approach for learning how to invest in value stocks.

About the Author

This is a guest post from Hung Nguyen – Co-Founder of Wealthy Education. Since 2014, he has helped over 10,000 students from over 140 countries learn stock investing and discover a life of financial independence. You can also find him on Twitter, Pinterest, and Facebook.

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