This website uses cookies to ensure you have the best experience. Learn more

Risk Management In Stock Valuation And Markets

2705 words - 11 pages

Investor’s investment decisions are based on the valuation of stock which they conducted before making the decision. Generally investors prefer to invest in the undervalued stocks and sell their holding of stocks that they considered to be overvalued. There are many different methods of stock valuation. In addition, there are many factors which increases the risk related to the valuation of the stocks. This paper focuses on the fundamental analysis used for the valuation of the stocks. Fundamental analysis generally use the price earning method, dividend discount model, or free cash flow model for the valuation of the stocks. On contrary to it, we focus on the factors which affect the stock market and valuation of the stocks.
Basic terms
Stock is a security that represents holding in a company and signifies a requisition on the company’s assets and profits ("stock,").
Stock market
Stock market is a market in which public companies issue or exchange their shares. Stock market is also known as the equity market. Stock market is an crucial part of economy as it provide opportunity for the companies to receive capital from investor in order to give them a part of ownership of the company ("stock market,").
Market risk
Market risk refers to the risk in which the possibility of an investor to face losses as a result of some factors that influence the performance of the financial market. It can occur in the situation such as recession, fluctuating interest rates ("market risk,").
Methods of stock valuation
Price-earnings method
Dividend discount model
Free cash flow model
Price earning model
Price-earning (PE) ratio is relatively easy method of stock valuation. It is based on the expected earning instead of recent earning (Madura, 2011). P/E ratio can be defined as the percentage of real stock value and last earning per share. P/E ratio makes comparison easy of the various companies’ performance in a particular industry. P/E ratio of the company, which could not make profit in a specific period, can be calculated. However, it is less reliable (Gottwald, 2012). In addition several variations in this method result in various valuations. There are basically two reasons behind this. First is the earning of the previous year are used as the denominator to predict the future income; however, the past year’s income do not give a right prediction of the coming year earnings. Second, sometime investors use operating income and it create the difference in the valuation of stocks (Gottwald, 2012). We can understand it with the help of an example:
Assume that a company will earn $5 per share in the coming year. And the average proportion of price of share to income of the rivals is 20. Now the value of the company share as folloes:
Per share valuation: EPS * X- PE ratio
= $5 * 20
= $100 (Madura, 2011)
Dividend discount model
In 1931 John B. Williams developed the dividend discount model. It is one of the first models used for pricing...

Find Another Essay On Risk Management in Stock Valuation and Markets

Importance of EMH in the valuation and investment Internet-related stock market

2980 words - 12 pages potential - the investor should look for big markets, global markets.Next the investor should consider performance of this management team in the past, and check if thy have a current vision, strategy, etc.The growth in the users, sales, page views, earnings, etc. compared to the past.The category of leadership that the firm is in, is the firm influencing other firms in the market?The price at which the stock of the company is trading compared to its

Stock Markets: Effective in Promoting Economic Growth?

1357 words - 5 pages provide participants in the market with the ability to share risk through banks, insurance and securities market Levine (1991) points out that stock markets enable individuals to diversify liquidity risk through portfolio formation moreover in the time of liquidity shacks they will be able to sell it in the market. Pagano (1993) argues that development in financial markets may have dubious effect on financial development. He claims that

Media Markets and Management

2795 words - 11 pages the competition of sourcing advertisers. Moreover, these markets are generally interrelated on the demand side. For example, the value of placing an ad in a local newspaper depends on the paper's circulation, and the subscribers' valuation of the newspaper is, at least to some extent, affected by the type and amount of advertising.2.3 Product life cycle of a new magazineStage one: Introductory phaseIn this stage the magazine is introduced to the

Middle East Countries’ Stock Markets under Contrarian and Momentum Strategies

1811 words - 7 pages ., & MacKinlay, A. C. (1990). When are contrarian profits due to stock market overreaction? Review of Financial Studies, 3(2), 175−206. Tobias, J. Moskowitz & Grinblatt, M. (1999). The Cross Section of Expected Returns and Its Relation to Past Returns: New Evidence. Yale School of Management Working Papers ysm127, Yale School of Management. Wang, J. Wu, Y. (2010). Risk adjustment and momentum sources. Journal of Banking &Finance, In Press, Corrected Proof. Available online 20 October 2010.

Risk and crisis management in tourism industry

3545 words - 14 pages safety practices, which can generate income and in a long term, as good practices will prevent court cases, dissatisfaction, failure, financial costs and lost costumers.In order to manage risks regarding to health, safety and security for tourists, a framework -presented in figure 1- for controlling risks and their consequences has been established in Australia and New Zealand since 1995, setting "a national standard for risk management &hellip


1472 words - 6 pages ; setting objectives, organizing and planning, motivation and communication, performance measurement and people management. In this light, we could deduce that the measure of managerial effectiveness of any successful enterprise is in its ability to; employ remarkable people with great skills and integrity, make use of the best accounting policies that reflect economic reality, engage excellent information channels, administer good risk measurement

Value & Risk Management in Construction

3143 words - 13 pages region of risk management of China as well stock marketplace". This document practical the VaR line of attack, to the stock advertise in China. From the comparison stuck between the predicted VaR and real go back, the calculated consequences are more often than not content with the self-assurance level at 95%. The wounded have remained in the strong-minded worth at risk.Fan.Y et all (2004) conducted their studies on the shanghai and shenzan

Risk Management in Health Care

621 words - 2 pages Risk Management is an area which involves the consideration of safety precautions for patients and also in different areas including the work place. Patient affairs are of major concern since it deals with life protection. There are various risk management techniques which ensures ones safety. The purpose of risk management is to discard any possibilities of misfortune due to lack of certain control measures. Risk Management was introduced to

Stock Markets: The Castle in the Air vs The Firm Foundation Theory

1412 words - 6 pages Conclusion     6 Introduction Castle in the Air Theory The Castle in the Air theory was introduced by John Maynard Keynes, an well known economist and successful investor of the 1930s. It was Keynes’ theory that the keys to investing came from supernatural or psychic means. He applied psychological rather than financial principles to the study of the stock market. He believed that it was not only too difficult but also

Risk Assessment and Business Management

962 words - 4 pages Risk Assessment and Management Problem The term risk assessment refers to an objective evaluation of risks to which end the assumptions and uncertainties are clearly put into consideration as well as presented. On the other hand in regards to risk management it has in most cases courted difficulties in the measurement of both the quantities in which risk assessment is concerned (Muzzi, Armando, and Augusto Panà, 2000, pp. 99-103). This is

Patient Safety and Risk Management

2152 words - 9 pages Patient safety and risk management should be intertwined in the organization. Patient safety is where the patient does not experience unnecessary harm or pain or other suffering during their treatment (Youngberg, 2011). Minimizing risk is to decrease unnecessary losses or improve or implement process that will decrease adverse event (Youngberg, 2011). The Samantha Jones adverse event is a perfect example to enhance patient safety through

Similar Essays

Insider Trading In Stock Markets And Sebi

10058 words - 40 pages USVII.CaseIntroductionStatutory AnalysisJudicial AnalysisFinal JudgementVIII.ConclusionIX.BibliographyEMERGENCE OF SEBIThe ever expanding investors' population and market capitalization led to a variety of malpractices on the part of companies, brokers, merchant bankers, investment consultants and others involved in new issues and stock in India.The glaring examples of these malpractices are as under:a)Existence of self-styled merchant bankers

Bubbles In Stock Markets Essay

1586 words - 6 pages ‘The stock market’s movements are generally consistent with rational behaviour by investors. There is no need to invoke fads, animal spirits, or irrational exuberance to understand the movements of the market.’ Discuss in relation to the information technology bubble and its collapse.      Introduction      In a perfectly efficient market, it is assumed that all investors have access to all

Stock Price Valuation And Beta Calculation

1247 words - 5 pages and preferences. Two types of market are found in the stock markets, which are the primary and secondary market. The primary market enables the companies to gather the funds directly from the investors when the secondary market provides the liquidity to the shares by enabling the investors to trade among themselves. Stock price valuation In Malaysia, the only stock exchange is the Bursa Malaysia. The Kuala Lumpur Composite Index (KLCI), also

Home Products: Stock And Bond Valuation

689 words - 3 pages . 5.5 million shares were issued in Feb. 1979 in connection with the merger of FDS Holding Company onto a subsidiary of HPI. Finally, it describes the common stock and informed that returns from common stocks come from the cash dividend payment and /or changes in the price of the stock. Two major factors that affect the price of stock are changes in the required rate of return, caused primarily by changes in risk, and change in the growth rate of