How can you assess the value of common shares?

In theory, the value of a common share represents the share’s ownership interest in the net assets of the issuing company.

Unless the issuing company is actually wound-up and the net cash proceeds from the sale of company’s assets after paying all liabilities is distributed to each common shareholder, the share’s value can only be estimated at best.

How the share’s value is estimated will be dependant upon a number of factors, many of which are very subjective and prone to revision. There are many different methodologies for measuring and estimating a share’s value and the interpretation of the resulting valuation can also influence the valuation decision.

The method of valuation can vary for different issuing companies, different industry sectors, different geographical areas and different time periods – present vs. future.

The resultant valuation can also vary with the selected “Ruler” used to measure the share’s current and future value.

Because of the various potential valuation outcomes and interpretations, two independent investors can examine the value of a share and arrive at completely different valuations leading one to purchase the share and the other to sell.

It is the open nature of share valuation that enables a market to properly function. Every healthy market place requires confident buyers and sellers for the same item. A healthy stock market requires a balance of confident buyers and a balance of confident sellers to function.

Related Questions