While planning your stock investments, it is very crucial to understand if the stock is priced properly or not. What does this mean? Well, many times the stock is not trading at its fair value, which is also known as the intrinsic value of share.
Nevertheless, how does this happen? Why shares of the company are underpriced or overpriced? Can investors get any benefit? If yes, how you can take advantage from such pricing? Answers to all these and more in the following article which will update you with the details soon.
Many factors like market capitalization, availabilty of information, policies and strategies taken by management have an influence on the price of the share. All these drivers not only impact the market price but also shift the price equilibrium of the share. In such case, it is very essential to know the main sources that lead to such shifts. Some of these can be management integrity and competence, new projects which will assure better turnovers, and the financial health of the company. Depending on the type of information, the result could be either positive or negative on the price of the share.
One can very easily benefit from understanding the variation in the price. If the stock is underpriced, it means that the share price is lower than its intrinsic value. This indicates that to achieve equilibrium, the price will rise in future. Therefore, it would be a wise decision to go long on the shares. On the contrary, if the share is overpriced, it means the current trading price of the share is more than that of the actual value. So if you already own the stocks, you can go short or sell the shares and take advantage due to the price difference. If you are not holding any position at all, then it would be wise to wait for some more time and allow the price to fall down.
Thus, by knowing the intrinsic value of shares, you can book your profits accordingly and very efficiently. There are many ways and models to arrive at the intrinsic value of the stock (Read: DCF Analysis). In addition, if the fair value and the market value are almost same, with negligible difference, then, you have scope to explore more before counting on the market sentiment for that stock alone.
About the Author
Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.Follow @SanaSecurities