Question

If I am comparing a stock price with its intrinsic value and get that the stock is overvalued, what types of trading strategies can I use based on this overvalued estimation? In other words, I need to determine the best trading strategy if something is overvalued and explain why.

Answer 1

In finance, you make money by buying low and selling high.

If a stock is overvalued, you would sell at the higher price and wait for the stock to correct to its intrinsic value and then buy back. You would use a strategy called short selling in this case.

First, you borrow some shares of the overvalued stock from your broker. Sell the stock in the market. When the stock price drops to its intrinsic value as you expected, you would buy the stock at a lower price in the market and give back to your broker. Thus making a profit by selling high and buying low.

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