Why Value Stocks and Shares
The reason it is important to be able to apply valuation methods to the stocks of specific companies, is because investors thus are able to tell the real value of the particular stock(s). If the investor is able to tell what should be realistically paid for the stock, he/she is thus able to eliminate some of the risks that go hand in hand with stock trading. Analyzing shares in such a manner, the analyst is able to make an estimate of at about what price and when the stocks should be purchased, and at about what price and when to sell them. Choosing the right company's share to invest in, in the longer run, between, say, 10 and 20 years, or sometimes even more, can really make a difference in the yield it brings to the owner of the shares. The investor has to know what factors are important and the way they influence share prices. For instance, it is known that ?investors hate losses more than they like gains? (Financial Times 2005, p.3), that is, psychological factors can have a greater effect on the prices then the merely rational factors. Both macro economical and micro economical factors influence the performance of a particular share, or whole markets and indexes, in the case of major events. Social and political happenings, such as wars, for instance, can also have a large effect on the performance of stocks and indexes. (The Economist 2003, p. 96) In effective markets, however, there are many investors, who are able to distinguish between shares, decreasing the risk of excessive stock price fluctuations.
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