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How do you get the value for stocks of a company?

The answer to this question might be harder than it looks because the price of a stock depends on various factors. Yet the pricing of the stock is the major key to determining the pricing of the stock itself. This is called as intrinsic evaluation and it basically means to evaluate the fundamentals on the basis of the business on which it is built. The price of the stock is what gives the business its value. In this article, we take a look at how the stocks are valued and on what basis is it evaluated.

Before we proceed further, we must first look at why do we need to evaluate a business? The answer is because often times, the shares are overvalued and sold. People often buy overvalued stocks and it can be disastrous for them, if you have also made such a decision, it will not be good for you. The reason for this is that if in any case, the company stock prices dip, you will have to pay more than what you should have. This is the reason why value allocation is necessary, it is to protect investors. You should never buy overvalued stocks, regardless of the reputation of the company.

There are three fundamentals which are used in value allocation. These are:

    Generation of cash flow: The company stock should be able to generate a cash flow for the company.
    Increase in growth: The cash flow generated should help the company invest that money and keep growing.
    Small risk, better outcome: Taking small risks can pay off big dividends in the future, and that should be your main business strategy.

The next obvious step is the process of allocation of the true value of the company stock? This can be done with the help of a discounted cash flow model or DCF as it is called. This is a method, which is commonly used to determine the true value of stocks. It is a commonly used method but cannot be used for all businesses. It is only applicable to businesses, which fulfil the first fundamental of business, which is a free flow of cash. The DCF method is used in two parts, first, you determine cash flow for the business from the investors and then in the second step, the DCF is used to calculate the value of the future cash flow. The sum of the future cash flow is what gives the stock its value.

The only issue with it is calculating the expected cash flow, as the future is unpredictable; using DCF has its risks. The chances of it going wrong are fairly even; hence you need to approach with caution. The best way to keep your eye on the market for accurate predictions is by keeping an eye on the earnings calendar. They keep a track of all the predictions and thus helping you invest in the best possible ones. An intrinsic value of stocks is what is drives this economy and you can be a good investor by keeping an eye on potential changes. 

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