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Introduction

Many of the people that trade in the stock markets do not really take the time to understand how those very same markets work. While this is something that you can survive if you happen to know a lot about the companies that you trade, it is at the same time not a particularly intelligent thing to do if you hope to be a stock market guru at some point down the road. If you want to make stock trading part of your living income then understanding the stock market inside and out is something that you absolutely must do and one of the concepts that you need to understand in order to get how the stock market works is the concept of stock valuation.

Stock Valuation

Stock valuation, quite simply put, is the process that stocks go through in order to get a value assigned to them. This is somewhat difficult to grasp conceptually in the abstract sense and is best illustrated through the use of an example.

Say that a particular company is interested in going public and getting money through selling stock in the company on a stock exchange. Well, for companies that are already in the market, it is largely the market conditions at the time that determine how the stock price goes up and down. However, for a company that is not already involved, a price for the stock initially needs to be set in order to allow the price to then be corrected by the market. Getting the initial price as close as possible to the real starting price is good because it means less hiccups in trading while the market corrects the price of the stock and therefore a method of assigning a value to the stock initially is required.

There are many such methods that are available to the experts, but at the same time the overall process of creating an intrinsic value for the stock is known as stock valuation. Stock valuation is something that all companies have to go through when they are doing an IPO on a particular stock exchange and it is something that is very important to understand for people that want to make their careers in stock trading.

Fundamental Factors Affecting Stock Valuation

There are a number of different factors that affect the stock valuation and a group of those factors can be referred to as being fundamental factors. Fundamental factors are any economic factor that might have a particular affect on the price of a stock. This means not only the general economic conditions that are prevailing in the market at the time but it is also something that refers to the specific economic conditions that a particular company is undergoing that could have either a negative or a positive effect on the stock price of that company.

Behavioral Factors Affecting Stock Valuation

After the initial stock price has been set, the valuation of the stock then goes from just a function of fundamental factors to a function of both fundamental and behavioral factors. For example, when you consider all of the different behavioral factors in the stock market, anything from a panic sell-off by a number of investors to a large purchase by just one investor can conceivably have an effect on the price of a particular stock. This is also known as supply and demand in other parts of the economy.

How the investors react to a particular event can have just as much effect on the stock price as the event itself. Because behavior is hard to interpret, stock valuation is by no means exact or precise. Understanding this is one step towards understanding the stock market as a whole.