You might wonder why a share/stock is trading at a particular price. This is a common question, especially if you are a beginner investor. You might know only about one type of value of share. But in reality, there are different types of values of shares.
By understanding the different types of value of shares, you can identify if a stock is fairly priced, overpriced, or underpriced. This article will guide you to learning the types of values a share and the different methods used for share price valuation.
What is the valuation of Shares?
The valuation of shares can be understood as the process of determining the right value of a share. It’s like considering all the parameters of a business and then placing a price for each equity share. It generally involves using financial indicators to assess the share value.
Different Types of Value of Shares
Different methods, such as financial metrics, investment analysis, and market sentiment, can be used to obtain different types of value of shares. The table below contains the primary ones
| S No. | Type of Value of Shares |
| 1. | Face Value |
| 2. | Market Value |
| 3. | Book Value |
| 4. | Intrinsic Value |
| 5. | Liquidation Value |
Face Value: It is the initial value assigned to the share by the respective company at the time of issuing it. It is used in accounting and for legal purposes. For example, If a share is assigned a face value of ₹10, it remains unchanged.
Market Value: The price at which the share is currently being traded in the market. It shows the supply and demand pressure along with the investor sentiment. Example: A share trading at ₹500 has a market value of ₹500.
Book Value: It is the net asset value per share. It is calculated as: (Total Assets – Total Liabilities)/ Total number of shares outstanding. It indicates the financial stability of a company. For example, A company with total assets worth ₹100 Crores, liabilities worth ₹40 Crores, and 10 Crores total outstanding shares has a book value of ₹6.
Intrinsic Value: It is the perceived value of stock, often determined through fundamental analysis. It helps in identifying if a share is overvalued or undervalued.
Example: A stock trading at ₹200 with an intrinsic value of ₹250 may be a fair investment.
Liquidation Value: It is the amount that every shareholder would receive if the company were to be liquidated today. It is used to determine the downside risk.
Example: If a company’s liquidation value per share is ₹50, but its market price is ₹200, it indicates strong growth potential.
Valuation Method of Shares
The valuation methods can be broadly divided into categories, given below:
Intrinsic (Absolue) Valuation Methods: Based on a company’s financials and fundamental analysis.
Relative Valuation Methods: Based on comparisons with similar companies.
Intrinsic Valuation Methods: The major used intrinsic valuation methods are mentioned in the table below
| Intrinsic (Absolute) Valuation Method | Formula |
| DCF (Discounted Cash Flow) Method | ∑CF/(1+r)^2 Where CF = Cash Flow, r = Discount Rate, t = Time Period |
| NAV (Net Asset Value) Method | Assets – Liabilities |
| Dividend Discount Model | Dividends/(r – g) D = Dividend, r = Required Rate of Return, g = Growth Rate |
| Earnings Capitalization | Net Earnings/Capitalization Rate |
DCF (Discounted Cash Flow) Method: This method estimates the intrinsic value of a company by calculating the present value of all the future cash flows, using a discount rate. This methos works best for growth companies. It accounts for future potential but also requires accurate projections.
NAV (Net Asset Value) Method: It calculates the value of a share by subtracting the company’s total assets from its total liabilities. Its best applicable to asset heavy industries. It is easy to calculate but ignores future earnings.
Dividend Discount Model: This method values a share by estimating the present values of all the future dividends. It primarily focuses on income and is not applicable for non-dividend paying companies.
Earnings Capitalization: It valuates a business by dividing its expected annual earnings by a capitalization rate (a required rate of return). This method emphasizes earnings but is sensitive to assumptions.
Relative Valuation Methods: The widely used valuation methods are listed in the table below
| Relative Valuation Method | Formula |
| Price to Earning Ratio | Market Price/EPS (Earnings per Share) |
| Price to Book Ratio | Market Price/Book Value |
| EV by EBITDA | EV/EBITDA |
| Price to Sales ratio | Market Capitalization/Annual Sales |
Price to Earning Ratio: It compares the company’s current share price to its EPS (earnings per share). It works best on mature companies and is easy for comparing but it can also be misleading at times.
Price to Book Ratio: It compares the current stock price to the company’s book value per share. It is ideal for banking and financial stocks. Also identifies undervalued stocks. But it does not works well on asset-light firms.
EV by EBITDA: This ratio compares the EV (Enterprise Value) to EBITDA (Earnings before Interese, Taxes, Depreciation and Amortization). Its great for analysing companies at an early phase not having any profit. It helps in mergers and acquisitions of companies.
Factors Affecting the Valuation of Shares
Different factors that affect the valuation of shares are given below
Financial Performance: The financial performance of the company over all the quarters impacts the valuation of shares. A good overall performance can have a positive effect on the valuation of shares and vice versa.
Company Fundamentals: The change in the fundamentals of a company also impacts the valuation of shares. Debt levels, cash follows, return on equity, etc all tend to have effect on the valuation of shares.
Economic Conditions: Economy effects the valuation of shares all over the stock market. A growing economy positively affects the valuation of shares.
Growth Potential: Companies with a strong growth potential in the future tend to have share valuations at a premium.
| Factors | Impact on Share Valuation |
| Dividend Payout | Higher dividends = Higher demand |
| Inflation | High inflation = Lower valuation |
| Interest Rates | High rates = Lower valuation, Low rates = Higher valuation |
| GDP Growth | High GDP growth = Higher stock prices |
| Exchange Rate | Rupee depreciation = Lower valuation for import-heavy firms |
| Industry Growth Trends | High-growth industries have premium valuations |
| Market Sentiment | Bullish sentiment = Rising prices, Bearish sentiment = Falling prices |
| Foreign Investment | FII inflows = Higher valuation, FII outflows = Market correction |
Final Thoughts
Different types of value of shares help in determining if the price of a stock is lucrative enough to make an investment decision. It is a must-do exercise for beginners as well as ace investors.
It is also a tool to gain an idea of the price fluctuation that a stock might undergo. Various valuation methods can be utilized to determine if the stock is undervalued or overpriced in the market.
