Question

What are advantages and disadvantages of stock valuation models you have learned in this chapter?

Answer 1

Stock valuation determines the intrinsic value of a stock and the intrinsic value determines the whether the stock is undervalued or overvalued its current market price.

Stock valuation models are two categories:

1. Absolute

1. Discounted Dividend Models
2. Discounted Free cash flow Models
3. Discounted Residual Individual Models
4. Discounted Asset Models

2. Relative Valuation Models

1. P/E ratio
2. P/S ratio
3. Enterprise value
4. Operating Margin

Advantages of stock valuation:

While investing in stocks, you must know the stock is undervalued or overvalued or whether to know buy or sell the stock.

Disadvantages of stock valuation:

Different models are available for stock valuation but difficult to find which method is to give absolute result on stock valuation.