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What does "Fairly Valued" Mean?

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  • Written By: Jim B.
  • Edited By: Melissa Wiley
  • Last Modified Date: 23 August 2018
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    Conjecture Corporation
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Fairly valued is an investment term that refers to a stock whose current trading price accurately reflects its actual value. This means that the price is neither overvalued nor underrated and that the market price is closely related to the true worth of the underlying company. Investors want to find out if a stock is fairly valued to determine whether it is a viable investment opportunity. Some different methods used to determine the value of stocks include price per earnings ratios, future earnings projections, and analysis of intangible factors.

The goal of all investors is to make a profit by choosing stocks with a potential for growth and disregarding those deemed to be in danger of losing value. While the market price of a stock can occasionally be a good indicator of its value, the fact that the market price fluctuates is proof that a company's true worth is hard to pin down. Determining whether certain stocks are fairly valued can be the difference between an investor who thrives on the stock market and one who struggles.

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To determine whether a stock is fairly valued, an investor must first make a determination on what the stock's intrinsic worth might be. The intrinsic worth of a stock is a measure of what the company is actually worth regardless of its current market price. This measurement can be based on a current analysis of the underlying company, or it can focus on a company's potential future worth, which might be useful if a long-term investment is planned.

One simple way that investors measure a company's intrinsic worth revolves around a statistic known as the price per earnings ratio. Taking this number and multiplying it by a discount rate, which is taken from a stable investment vehicle like a government bond, provides a number that can then be measured against the market price. If the two numbers turn out to be similar, then the investor might glean that the stock is fairly valued.

Future earnings per share estimates might be worthwhile in trying to measure a company's potential as a way of determining the value of its stock. Other investors might use statistical information in concert with their assessment of other intangible factors. For example, a company that is struggling statistically could hire new management with a proven track record, and the company's stock might not be fairly valued if the market price doesn't reflect these changes. Combining numbers with reasoning might be the most prudent way to value stocks.

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