Stock Valuation

Stock valuation is done by various methods. Companies try to give an estimate of their fair value by the use of several fundamental economic criteria. This estimation should be perfected with the market criteria to determine potential market prices.

The most popular stock valuation method is called income valuation or the discount cash flow method. It involves discounting the profits like dividends, earnings or cash flows that the stock will bring to the stockholder in the future and a final value on disposition.

The discount rate should also include a risk premium based on the capital pricing model. The Gordon model or Gordon's growth model is best known discounted dividend models. According to this model the dividends will increase constantly at a particular growth rate that is less than the discount rate. According to some people if the stock is listed in a well organized stock market along with a large volume of transactions, the listed price will be closer to the estimated fair value.

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