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Part: two Analysis Tools > Analysis Tool #2: Valuation

Chapter 5. Analysis Tool #2: Valuation

How much is a stock worth? If we knew, making money in the stock market would be easy. All we would have to do is buy stocks currently trading below their value, and then simply sit back and wait for them to move up to their “correct value.” Of course it's not that easy. Unless it pays a meaningful dividend, a stock has no value, other than what another investor is willing to pay.

That said, there are a plethora of stock valuation schemes in use. Many originated when stocks did pay significant dividends. These measures originally valued stocks by calculating the present value of their expected future dividends. That made sense, but over time dividends faded in importance, and now most investors buy stocks for capital appreciation and don't consider dividends in their evaluations. You'd think that given that shift, analysts would have found new ways of valuing stocks. Many have, but many others simply replaced dividends with expected earnings or cash flow and continue using the same formulas. That makes sense from an academic perspective, but I doubt that you will find anyone willing to buy your shares at a price calculated by those methods.


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