What is stock price – an important indicator showing the value of a company on the stock market. It reflects investors' confidence in the company's future prospects. Stock price plays a decisive role for investors, affecting their decisions to buy, sell or hold stocks. Through stock price analysis, investors can develop effective investment strategies and optimize financial investment profits.
1. What is stock price?
Stock price (Stock Price) is the price at which a stock is traded on the stock market at a particular time. This is the actual value that an investor must pay to own a stock at the time of the transaction.
For example, if the stock price of XYZ company is 50 VND/share, then that is the market price of XYZ stock at that time.
However, it is necessary to distinguish What is stock price? with the book value of the stock. Book value calculated by dividing the total value of a company's equity by the number of shares outstanding. This value usually remains constant during an accounting period and is often used to assess the value of a company's assets, not to reflect the stock price on the stock market.
Stock prices play an important role in the investment decision-making process of investors. Unlike the stock price which is fixed by the issuing company, stock prices fluctuate according to market demand and often change over time. This makes monitoring and understanding these fluctuations extremely important in order to make reasonable investment decisions.
Market price of stock is the result of the interaction between supply and demand in the stock market. When there is an increase in demand to buy, the stock price will increase and conversely, when there is an increase in demand to sell, the stock price will decrease. These fluctuations can reflect both investors' confidence and expectations about the company's future prospects.
To make accurate investment decisions, investors need to grasp the Factors affecting stock prices, including information on the company's financial situation, business performance, market situation and the general economy. In addition, assessing market price fluctuations also helps investors adjust their investment strategies flexibly and effectively.
2. Characteristics of stock market prices
Stock price is one of the most important indicators when evaluating a company's performance and investment potential. The characteristics and role of stock market price can be summarized as follows:
- Always changing: Stock prices are unstable and fluctuate frequently under the influence of many factors such as economic conditions, changes in the industry, market information, and crowd psychology.
- Reflects market confidence: Stock prices reflect the market's confidence in a company's future prospects. When the market believes that a company will grow strongly, stock prices will increase. Conversely, when there are negative signs about a company's business operations, stock prices may decrease.
- Not always equal to real value: Stock prices do not necessarily reflect the true value of a company. This can be due to factors such as crowd psychology, market information, or incorrect valuations from investors.
- Depends on return and risk: The market price of a stock depends on the return an investor can earn from holding the stock and the level of risk they face. These factors include expected earnings, the company's dividend policy, and the level of risk in the industry.
- Indications of market and economic conditions: Stock prices also reflect the general state of the market and the economy. When the stock market and the economy are strong, stock prices often increase. Conversely, when there are signs of recession, stock prices may decrease.
- Promote business development: High stock price can help the company easily raise capital from the capital market, attract investors and increase opportunities to expand business and invest in new projects.
In short, stock price Not only is it an important indicator of a company's financial performance, it also reflects market confidence and the overall health of the economy.
3. Factors affecting stock prices
Business results of the enterprise
Market price of stock is a reflection of the business performance of the issuing company. When a company operates efficiently and grows, profits and dividends are often high, attracting investor interest and increasing the stock price.
On the contrary, if the company encounters difficulties, losses and ineffective operations, the loss of confidence from investors is inevitable. This leads to a decline in stock prices in the market. Investors often rely on business results to evaluate the real value of stocks and make investment decisions.
Market and general economy
The market and the overall economy play an important role in shaping stock prices. Economic stability and growth often create favorable conditions for businesses to grow, increase profits and dividends, and increase the attractiveness of stocks to investors. This often leads to market price of a share.
Conversely, when the economy is in trouble or recession, businesses often have difficulty operating, resulting in lower profits and lower dividends. This decline causes investors to lose confidence, often leading to capital withdrawals from stocks and investment in other sectors. However, there are still industries or businesses that benefit in difficult times, and savvy investors often look for opportunities in any economic situation.
Supply and demand in the stock market
Stock prices reflect the interaction of supply and demand in the stock market. For businesses with positive business prospects and growth, many investors will want to buy stock their shares, expecting high profits. Conversely, when a business is in trouble and shows signs of decline, investors may sell their shares. This sell-off can lead to a sharp decline in the stock price, and at the same time, investors will receive less profit.
Large-cap companies often attract the attention of large investors, which can push their stock prices up. However, investing in these stocks may not yield explosive returns. On the other hand, small businesses, with limited shares, can have the potential to increase their prices dramatically, yielding higher returns for investors, perhaps even doubling or tripling their value.
4. How to calculate stock price
How to calculate stock price Valuation is a complex and multidimensional process that uses a variety of methods. Investors typically use valuation methods based on a company's earnings, assets, or cash flows. Earnings-based valuation methods such as P/E ratio and EPS help evaluate business performance. Asset- and cash-flow-based valuation methods such as DCF and DDM focus on asset values and future cash flows to estimate the value of a stock. The combination of these methods provides a comprehensive view of the stock's market price.
Way discounted cash flow stock valuation
The intrinsic value of any business is determined by its cash inflows and outflows. Therefore, we can use this as a basis to partly determine the stock price of the business.
Valuing stocks based on discounted cash flow, we have the formula: PV = FV / (1 + r)^n
In there:
- r is the discount rate, and n is the number of years of investment.
- PV stands for Present Value: The current value of a stock.
Based on cash flow is stock valuation method The most basic and popular valuation method used by many people. If you are new to stock investing, this is the first and most basic valuation method you need to know.
However, this formula is rarely applied by large investors because the results are only general and for reference only and do not accurately represent the real value of the stock.
Stock valuation by dividend discount method
Dividend discount or dividend yield is the ratio of cash dividends to the stock price. So we have the formula:
Dividend discount = Cash dividend / Market price
When an investor hears that a certain stock pays a dividend of 20%/year, the investor should understand that this means that they pay a dividend of 20% compared to the real value (par value) of the stock.
For example:
For a stock with a real value of 30,000 VND, a dividend of 30% means 6,000 VND, a dividend of 15% means 3,000 VND.
Stock valuation using the dividend discount method is also one of the most basic stock valuation methods, applied by many new investors without much experience.
How to value stocks using the P/B method
The full name of the P/B ratio is Price to Book Value Ratio (PBR). This ratio is calculated by analyzing how many times the current stock price is compared to the net assets recorded in the company's financial statements.
Stock valuation formula using P/B method: P/B = Market share price / Book value of 1 share
The Price-to-Book (P/B) ratio is often used to value companies with highly liquid assets such as investment companies, finance companies, and banks. This is because P/B typically compares the price of a stock to the company's book value, reflecting the relationship between the market price and the company's net asset value.
However, P/B is not an effective valuation tool for service companies or companies with rapid growth rates. This is because P/B cannot capture the value of intangible factors such as brand strength, future cash flows, or management factors.
Therefore, while P/B can be useful in valuing some types of companies, investors need to consider and use different metrics appropriate to each type of business to make accurate investment decisions.
Guide to stock valuation with P/E method
The P/E ratio, also known as PER, is an abbreviation for Price to Earning Ratio. The P/E ratio is calculated by the number of years it takes an investor to break even in the process of investing in a company's stock (with constant profits).
Stock valuation formula with only P/E formula: P/E = Market Price / EPS
In there:
- P (short for Market Price): Market price at a transaction time
- EPS (short for Earning Per Share): Net profit per share
Net income per share is calculated using the following formula:
EPS = (Earnings after tax – Preferred stock dividends) / Total number of common shares outstanding
The Price-to-Earnings (P/E) ratio is an important measure that helps investors evaluate the value of a stock. When the P/E ratio is low, it means that investors are willing to pay less for each dollar of the company's earnings. This may indicate that the stock is undervalued due to financial problems, although the company may have a temporary surge in profits from asset sales or investments.
Conversely, when the P/E ratio is high, it usually indicates that investors are paying a higher price for each dollar of earnings. This may indicate that the company's future prospects are good, even though current earnings may not be high. Based on the P/E ratio, investors can make decisions to buy or sell stocks depending on their assessment of the company's prospects and current value.
Source: Onstocks
