When you begin investing in stocks, one of the most important things you can learn is how to value the shares you own. Without this skill, it becomes impossible to determine whether a stock is high or value in comparison to the normal performance of the company.
Understanding how to value your shares becomes important when your goal is to sell. In this article, we’ll examine how to efficiently value your shares and how to sell them afterward.
Why Would You Assign Values to a Stock?
Many people assume that a stock’s value is the same as its current market price. However, this isn’t always the case. A value is assigned to stock because it helps investors to decide whether they want to purchase certain stocks. Additionally, there is more than one way to determine the value of a share.
A large majority of active investors that develop the time to formulate strategies value stocks based on their beliefs that the value is separate from the market price. These investors use a certain set of metrics to determine the value against the current price based on the market.
However, passive investors believe that the value and market prices are one and the same. They believe all relevant information is built into the stock, so the market price reflects the actual value.
How Do You Determine Value Shares?
The value of a stock is determined using the P/E ratio. This is known as the price-to-earnings ratio and is commonly what most investors use to give the value of their shares.
In this section, we’ll use an example stock to explain how to determine the value. Let’s take Walmart, for instance. In 2021, the company reported diluted earnings per share of $4.75. Currently, the share price of the company is $139.78.
To obtain the value, you simply divide the $139.78 by $4.75. This gives you a value of 29.43.
You can use the value of a stock to approach selling certain shares you wish to liquidate. Normally, using this approach to sell is simple.
Selling Once You Value Shares
Typically, a value investor would prefer a stock with a low P/E ratio. When the P/E ratio is substantially lower than the market value, this is a more attractive option for a short-term investor.
Alternatively, growth investors look for stocks with a high P/E ratio. They seek situations where this ratio is higher than the market value.
Understanding how to value shares isn’t mandatory, according to some investors. However, it doesn’t hurt to have a significant amount of knowledge regarding this metric if you own stocks. Knowing how to determine the value could benefit you when it comes time to sell shares, netting you more money from your investments.