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What Are the Different Methods for the Valuation of Shares?

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  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 17 July 2014
  • Copyright Protected:
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    Conjecture Corporation
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Determining a method for valuation of shares in a company can be done by investors in a variety of ways. This process can be necessary for those investors who have shares in a privately owned company and cannot immediately point to a stock market price as a determination of value. Those traders who have publicly owned stock may also want to delve deeper than market prices to figure out the valuation of shares. Some valuation methods include earnings ratios, dividend expectations, and more subjective methods focused on a company's leadership and strategies.

It is easy to look at a stock market ticker and see the current market price of a stock as a way of determining the valuation of shares. For example, a person with 10,000 shares of a stock that is trading at $20 US Dollars (USD) per share could simply multiply the two numbers to get an approximate value of his holdings in the company, which would amount to $200,000 USD. Unfortunately, this method may not represent the shares' intrinsic value, which is their actual worth regardless of the stock price.

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For that reason, investors use other methods for determining the valuation of shares that dig deeper than simply looking at the market price. One of the simplest types of these methods is an earnings ratio, which determines how much investors are willing to pay for the earnings of a publicly traded company. If the market price is significantly higher than a company's earnings level, it means that the market is expecting the company's earnings to increase in the future. A lower earnings ratio means that the market has negative expectations on the company's future prospects.

Assessing the net asset value of a company, which measures the book value of a company's assets against its market price, is another common method of valuation of shares. Some methods of valuation may incorporate the paying out of dividends, which are bonuses paid out to stockholders in a company. It is important to note that owners of preferred stock would enjoy a higher valuation of dividends, as they are often paid dividends when common stockholders are not.

Many people prefer to use statistics as simply a background for valuation of shares, preferring to look at more subjective evaluations of a company's prospects to determine the worth of their holdings. For example, a company may have a dwindling market price, but an investor could have positive feelings about the future of the company based on the hiring of a new chief executive officer. Real-world current events could also play into an investor's feelings about a company's true worth.

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