Process To Value Stocks – Stock Valuations
Valuing stocks is a process by which a market expert analyzes a company’s general ledger, or “books”. The method by which a company or corporation derives profit is examined and evaluated as to profitability and relative competition. The stock price should reflect the company’s debt to equity ratio, profit and loss statements, assets and liabilities, current contracts, receivables, media value and perception, and credit ratings in their country and activities globally.
The size of stocks held outstanding in a current stock market will also affect their abilities to issue more. Profitable companies can issue concurrent stock issues, but companies with less than stellar records and financial values may not be able to find a financial institution or brokerage house to sponsor the stock issue and take responsibility to sell all the stocks. Financial institutions of this type are called underwriters because they sign on the documents to sell the stock under the line of the principal owner signatory (the company).
There is a social contract as well as a financial one with stockholders that officers of a company’s Board of Directors and managers answer to. Sophisticated corporations can hide liabilities or shift accounting reporting to show their company to advantage, or take strategic losses to undervalue assets for future stock issues. Attempts to buy back stock issues to control corporate decision making are expensive but common.
Stock holders can leverage their investment and oust unsatisfactory management. The acquisition of a sizable amount of stock from one company must be done with an SEC filing notifying corporate officers that a merger or acquisition bid may be in effect. Usually this is done to follow up with requests to examine bookkeeping and financial statements to value a purchase price including stock issues correctly.
Often a company will “plump up” the books by cutting headcount, liquidating unprofitable divisions, or securing better credit terms at more favorable interest rates. All these activities produce a more favorable analysis by stock market experts for an initial or standing issue series of stock. They can also try and prevent a takeover (but shortchange stockholders) by hiding assets and liquidating off-ledger holdings. Promotional activities such as advertising and philanthropic sponsorships, public relations and a strong moral profile also demand a higher stock value.
A customer of a wire house, or stock market brokerage, is more likely to purchase or invest in stocks from a known brand rather than a company enmeshed in environmental lawsuits, tainted products, or a corporate scandal. These complex dynamics amount to a vital but volatile primary and secondary market in stocks and the activity of the main world stock exchanges in New York, London, and Tokyo.