Stocks: A Complete Guide
Stocks are the most widely known and popular investment among retail investors. They offer strong historical returns, are highly accessible, and are talked about regularly. This guide will tell you everything you need to know about stocks – including what they are, how they’re valued, and how you can profit from investing in them.
Reading time: 28 min
Written by:
Dan Malone
What Are Stocks?
Stocks, also known as shares or equities, represent an ownership interest in a company. When you invest in stocks you become a part owner of a company. The more shares you own, the more of the business you own. That’s why the owners are called the shareholders.
Investment Example: You could own part of Microsoft by buying one share. However, there are over 7 billion shares of Microsoft in circulation, so buying a single share would only give you a tiny ownership stake in the corporation.
There’s no real difference between stocks and shares. Investors normally use stocks when talking about investments in companies generally. Shares usually refers to ownership in one specific company. For example, you might say: “I mainly invest in stocks”, but “I own shares in Microsoft”.
How Are Stocks Created?
Public stocks are created when a company issues and sells shares to the public through an Initial Public Offering (IPO). This is referred to as ‘going public’. In an IPO, a company will seek to sell these new shares to large institutional investors like mutual funds, pension funds or private equity firms. This is done on the primary market.
These institutional investors can then sell their shares to regular investors, like you and me, on the secondary market. Once they make it to the secondary market, they can be bought and sold by investors around the world through investing platforms.
Prior to an IPO, a company will typically be established as a private limited company. It will usually be owned by the original founders as well as early-stage investors, such as angel investors or venture capitalists. Shares in private companies can’t be bought and sold as easily as shares in public companies.
Key Insight: Investing in private companies, referred to as ‘private equity investing’, is becoming increasingly accessible to the average investor. Historically, private equity was reserved for high-net-worth individuals and specialist investment funds. These days, there are many investing platforms that allow regular investors to participate in the investment rounds of private companies.
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Why Do Companies Issue Stock?
Companies issue stock to raise money. This money could be used to expand into a new market, acquire a competing firm or hire additional staff, among many other use cases.
When a company is founded, its owners may choose to fund its operations with their own cash or through the business’ revenue. This is called bootstrapping. But many companies can only get so far on their own and they may eventually need external funding to achieve their full potential. That’s where issuing stock comes into play, but it comes at a cost: control.
Example: John’s Bakery Limited is 100% owned by John. He started the company with €10,000 of his own savings and he owns 10,000 shares at €1 per share. He has bootstrapped his business to date. His bakery is a huge success and he realises that if he opens three new bakeries, he could massively increase his profits. But to do that, he needs €300,000 that he doesn’t have.
A private investor offers John €300,000 in exchange for 33.33% of the company. That values John’s bakery at €900,000. He accepts the offer and issues the investor 5,000 shares in John’s Bakery Limited at €60 per share. John gets €300,000 to expand his business, but he now only controls 66.67% of the company.
Why would any privately run company want to issue stock and give up control? Well, ask yourself, would you rather own 100% of a €10 million company or 15% of a €10 billion company? Most business owners are happy to give up some control if the money they raise allows them to build a bigger enterprise than what they could have built without it.
That same concept applies to an IPO, just on a much larger scale. An IPO is also an opportunity for the founders and early-stage investors to cash out some of their holdings in the public markets. However, there’s a common misconception about what’s happening when you buy a stock on the secondary market.
Reality Check: When you buy a stock, you’re not physically funding the company there and then. That already happened when the stocks were originally issued on the primary market. Instead, when regular investors purchase a stock, they’re simply buying it from another investor. A single share can change hands an infinite number of times once it reaches the secondary market.
An IPO is just one lever that a company can pull to access additional cash flow. The other main sources of finance are:
Debt: For example, borrowing money directly from a bank or issuing corporate bonds to investors.
Venture capital: Typically Series A to Series E funding raised through one or more venture capital funds.
Operating cash flow: Money organically generated from the business’ operations.
The benefit of raising money through the equity market is that, unlike debt, equity financing doesn’t have to be repaid. There’s no mandatory interest charge either; paying dividends to shareholders is entirely optional.
How To Invest In Stocks
To invest in stocks, you’ll need to use an investing platform. Find the best stock trading apps in Ireland:
When you have an investment app downloaded, you can find stocks in-app or search for a company that you want to invest in. There are thousands of shares available. If you have one in mind, search for it using its International Securities Identification Number (ISIN). That way, you won’t buy the wrong stock by mistake.
Once you’ve found the company, you can buy shares once-off or set up a recurring purchase every week, month or quarter. You’ll need to know how trading platforms work before investing. Our complete guide to investment platforms will have you stock investing in no time.
How Do You Profit From Company Stocks?
There are two main ways that you profit from owning company stocks: capital appreciation and dividends.
Capital Appreciation
Capital appreciation means an increase in the value of your stocks, i.e. the current share price is greater than what you paid for it.
Dividends
The second way that you profit from owning stocks is through dividends. Certain companies may choose to pay investors a portion of its retained earnings as a reward for owning the shares. This is what’s known as a dividend.
Not all companies choose to pay a dividend. For those that do, it’s commonly paid on a quarterly basis. Others may pay a dividend on a monthly, half-yearly or yearly basis.
Tax Implications: In Ireland, gains on stock investments are liable to capital gains tax at 33%. Dividends are liable to income tax, USC and PRSI up to a combined rate as high as 52.2%. Learn more about taxes on investments by checking out our dedicated guides.
A company may choose to repurchase some of its own shares instead of, or in addition to, a dividend. This is known as a share buyback. A share buyback has the same economic effect for a company as a dividend, but it can be a more tax-efficient way to reward investors.
A share buyback achieves three things:
- It reduces the number of outstanding shares so that each investor owns a greater percentage of the company.
- It signals to the market that management believes the stock is undervalued.
- It increases earnings-per-share (EPS) which can lower the price-to-earnings ratio (P/E ratio) if the stock price stays the same, making it more attractive.
The risk of a share buyback is that the stock could be overvalued, leading to a reduction in shareholder value. That cash could have been used more productively, like reinvesting in the business or even paying dividends.
Common Shares vs. Preference Shares
Not all shares issued by a company operate in the same way. There are two main types of shares that a company can issue: common shares and preference shares.
Common Shares
These perform as you’d expect. Investors buy them, they receive a vote in company decisions and partake in the ups and downs of the stock’s performance.
Preference Shares
Preference shares behave more like bonds. Investors receive a fixed dividend payment and rank above common shareholders, but behind bondholders, in the event of a liquidation. However, they have no voting rights and have much less potential for capital gains.
Dividend Stocks vs. Growth Stocks
Companies focus on providing returns to their investors in different ways. This has led to two popular classifications: dividend and growth stocks.
Dividend Stocks
Dividend stocks are companies that pay a dividend to their shareholders on a regular basis. These investors value passive income. They invest in stocks that’ll make them money regardless of how the market is performing.
Growth Stocks
Growth stocks are companies that are expected to grow at a faster rate than the market. These businesses typically choose to reinvest all of their earnings instead of paying a dividend to shareholders.
Investors who choose growth stocks are looking to earn large capital gains in the future. They’re willing to miss out on dividends today to potentially achieve that.
Stocks & The Economy
A stock can be further classified in accordance with how it reacts to changes in the broader economy:
Cyclical stocks are linked to companies whose profits are dependent on the strength of the economy. For example, companies involved in the travel or hospitality sector may see their stock prices decline when people have less money to spend on holidays i.e. in a recession.
Defensive stocks are linked to companies that operate in sectors that will always have demand no matter how bad the economy gets. For example, utilities, consumer staples and healthcare. Customers still need to buy food and turn the lights on in a recession.
Secular stocks are linked to companies that profit from long-term megatrends. It could be a shift in consumer behaviour, a technological development or another fundamental change.
For example, with the movement towards artificial intelligence (AI) and cloud computing, companies like Nvidia, Microsoft and Amazon have created secular parts of their business. A single company can have both secular and cyclical business units.
Interest-rate sensitive stocks are linked to companies whose profits are tied to prevailing interest rates set by policymakers like the U.S. Federal Reserve, the European Central Bank (ECB) and the Bank of England.
For example, stock prices of Irish banks soared in recent years due to a prolonged period of high and rising ECB rates which allowed the banks to grow their net interest margin and, as a result, their profits. Conversely, a company with a large amount of debt, like a real estate investment trust (REIT), may suffer stock declines as rates rise due to higher borrowing costs.
What Stock Ownership Really Means
It’s not really the stock ownership that’s important, it’s what the ownership represents. For example, a single share in Apple represents:
- 1
An entitlement to the net assets of Apple; and
- 2An entitlement to the future earnings of Apple
Entitlement to Net Assets
Apple has lots of assets. It owns property, it has cash, and it has inventory, but it also has liabilities. It needs to repay its lenders any money it borrows. If Apple were to go into liquidation, all of its assets would be sold for cash. That cash would be used to settle any liabilities that it has. Once that’s been done, any cash that’s left over would be split between the owners of the company in proportion to how many shares they own.
That’s what we mean when we say you have an entitlement to the net assets of the company. In the event of Apple’s closure, you would receive your proportionate share of company assets, net of any liabilities, even if you only owned one share.
At any given point in time, the minimum price that a share sells for should be equal to:
Company Net Assets ÷ Total Shares Outstanding
In other words, the proportion of the company’s net assets that one share would get you in the event of a liquidation. This is known as the book value per share (BVPS).
If you knew that you’d receive €200 as a payout for your share in a liquidation, you wouldn’t sell that share for any less than €200 under normal circumstances. You’re guaranteed to receive €200 worth of net assets from the company, so there’s no reason to sell that right for any less.
Key Insight: In practice, if a company goes into liquidation, it could very likely be insolvent. In that case, its liabilities (what it owes) would be larger than its assets (what it owns).
Shareholders would receive no payout of net assets for their shares because there are no net assets to pay out. BVPS is a helpful way to visualise the minimum price or value of a single share at a certain point in time.
The book value per share will change over time as the company increases and decreases its assets and liabilities. When you buy shares, the price that you pay will nearly always be larger than the BVPS. That additional price is what you’re paying for the entitlement to future company earnings.
Entitlement to Future Earnings
We don’t know exactly how much a company will earn in the future, but we can make an estimation. That estimation is based on many factors, including:
- The past earnings of the company
- The growth potential of the company’s industry
- How the economy is performing
Whatever the market decides is a fair estimation of the company’s future earnings will directly impact the price of the company’s shares. The higher the estimation, the higher the price above book value per share that you’ll have to pay to buy those shares.
As a buyer, the more conservative the market’s estimation, the better, because you'll buy the shares for a lower price. As a seller, the more optimistic the market’s estimation, the better, because you’ll be able to sell the shares for a higher price. Ideally, you want to buy from pessimistic investors and sell to optimistic investors.
Key Insight: At its most basic level, a stock price is made up of:
- 1
The book value per share, which is the minimum price, and- 2
An estimation of the per share future earnings of the company.
Stock prices are largely determined by the market’s expectations for what a company will earn in the future. The problem is that the future is uncertain. Investors can only make their best guess as to what future cash flows will look like. Unforeseen market, industry or global developments can greatly impact cash flow expectations and, as a result, stock prices. If a company misses its earnings expectations or downgrades its estimates for future earnings, its stock price will typically fall.
How Stocks Are Valued
The price of every stock on the stock market reflects the market's expectations for what a company will earn in the future. The question is whether you agree with those expectations.
Key Insight: The total perceived value of a company is referred to as the market capitalisation or ‘market cap’. Market capitalisation is calculated as:
Current Stock Price x Number of Shares Outstanding
Companies will be classified as small, mid or large-cap stocks based on their market cap. Additional classifications such as nano, micro and mega-cap can be used too. There are no fixed definitions for each classification, it’s open to interpretation. For example, one investor may decide that:
- Mega-Cap: >$200 billion
- Large-Cap: >$10 billion
- Mid-Cap: >$2 billion
- Small-Cap: >$300 million
- Micro-Cap: >$50 million
- Nano-Cap: Under $50 million
To understand how stocks are valued, we must first understand the time value of money, because what we’re buying is an entitlement to future cashflows. A euro in the future is worth less than a euro today. If you could receive €1,000 now or €1,000 in one year, which would you choose?
Money that’s received now can be saved or invested. If you waited a year to receive €1,000, you’d lose 12 months' worth of opportunities that could be availed of with that €1,000. That ‘loss of opportunity’ requires us to discount the value of money received in the future to a present value (PV).
Discounted Cash Flow (DCF) & Discount Rates
To do this, we need to use a discount rate, which determines how much less future cash is worth to us today. The higher the discount rate, the less future cash will be worth:
- If the discount rate is 10%, €1,000 in one year would be worth €909 today
- If the discount rate is 2%, €1,000 in one year would be worth €980 today
If we want to find the present value of a series of cashflows arising at different points in the future, we can use a discounted cashflow (DCF) model. The formula for a DCF is:
(CF1 ÷ (1+r)t) + (CF2 ÷ (1+r)t) + etc.; where
CF1 = cash low in year one
CF2 = cashflow in year two
- r = discount rate
- t = the year
DCF Example: Let’s say we wanted to find the present value of €1,000 per year for 5 years, assuming a discount rate of 10%. Based on the DCF model, we’d only pay €3,790.79 or less for the entitlement to this future cash low:
| Year (t) | Cash Flow (CF) | Discount Factor (1+r)t | Present Value |
|---|---|---|---|
| 1 | €1,000 | 1.1 | €909.10 |
| 2 | €1,000 | 1.21 | €826.45 |
| 3 | €1,000 | 1.331 | €751.31 |
| 4 | €1,000 | 1.4641 | €683.01 |
| 5 | €1,000 | 1.61051 | €620.92 |
| Total | €5,000 | - | €3,790.79 |
Discounting Company Future Cash Flows
A company’s future cashflows need to be discounted to a present, per-share value so that it can be reflected in, or compared to, the current stock price.
There are two main methods used by investors to set a discount rate for a company’s future cashflows:
The Capital Asset Pricing Model (CAPM) generates a discount rate that reflects the return that investors would expect to receive on their investment. It considers:
The risk-free rate (%): The rate of return they could safely earn elsewhere, typically 10-year Government bond yields
The equity risk premium (%): The excess expected return of the equity market over the risk-free rate of return
The company’s beta: The stock price volatility of the company relative to the wider equity market, measured at, above or under ‘1’
Beta Explained: ‘The market’ will always have a beta of 1. For example, an MSCI ACWI IMI ETF should have a beta of 1 as it tracks the global stock market. A beta above 1 means that a stock price is more volatile than the market. A beta less than 1 means a stock price is less volatile than the market.
If a company stock had a beta of 1.2, that would mean that it’s 20% more volatile than the market. So if the market moves by +/- 10%, the stock price would be expected to move by +/- 12%. A stock’s beta will typically be displayed on your investing platform.
The formula for CAPM is:
(RF + (B x (MR - RF))) x 100; where
- RF = risk-free rate of return
- B = the company’s beta
- MR = the expected return of the equity market
CAPM Example: Say 10-year Government bond yields are 3%, the expected return of the equity market is 8% and the company’s beta is 1.2. The discount rate under CAPM would be equal to:
(.03 + (1.2 x (.08 - .03))) x 100 = 9%
9% is the rate of return that would be required by the investor to consider the investment. This would be used to discount the future cash flows to a present value.
(E ÷ V x Re) + (D ÷ V x (Rd x (1 - t))); where
- E = Market capitalisation
- D = Total short and long-term debt
- V = E + D
- Re = Cost of Equity
- Rd = Cost of Debt
- T = Corporate tax rate
CAPM is a key component of the WACC, representing the cost of equity i.e. the return required by investors. The cost of debt is the effective rate a company pays on its borrowings, adjusted from tax-deductible interest payments.
WACC Example: Let’s assume the following facts for a hypothetical company:
Step 1: Calculate Cost of Equity Using CAPM
Step 2: Calculate After-Tax Cost of Debt
Step 3: Determine the Weights
Step 4: Calculate WACC
7.65% would be the discount rate used to find the present value of future company cash flows. WACC is a suitable discount rate because the market rate of a company’s debt and equity reflects the perceived risk of its future cash flows.
Free Cash Flow (FCF)
Free Cash Flow (FCF) is the cash generated by a company after covering operating expenses and capital expenditure. FCF is used in DCF models as it represents the cash that could be paid out to investors. There are two main types of free cashflow:
Free Cash Flow To Firm (FCFF) is the cash available to all funding sources including debtholders and shareholders. FCFF is discounted using the WACC as it accounts for both the debt and equity of the company.
Free Cash Flow To Equity (FCFE) is the cash available for distribution to shareholders. FCFE is discounted using the CAPM.
Key Insight: FCFF and FCFE can be calculated using publicly available financial information. The audited financial statements of a company are a good place to start. Creating forecasts about future free cash flows is a complex exercise that requires a detailed understanding of the financial statements, industry, operations and capital structure of the company.
Terminal Value (TV)
Terminal Value (TV) is the estimated value of all future cashflows beyond a specific point in time.
With a DCF model, we’re attempting to calculate the present value of all future free cash flows that the company will generate from now until the end of time. The problem is that it becomes increasingly difficult to make accurate forecasts the further into the future you go. To solve this problem, a single value is put on the cash flow that a company could earn beyond a specified forecast window. This is known as the Terminal Value.
A DCF calculation will therefore have two stages:
Stage 1: Calculate the present value of future free cash flows for the forecast period, typically the next 5-10 years
Stage 2: Calculate the terminal value of future free cash flows beyond year 10
Key Insight: The present value of future free cash flows for both stage one and stage two are summed together to arrive at a total present value of future free cash flows.
There are two main methods for calculating terminal value: the perpetuity growth method and the exit multiple method.
(CFn x (1 + g)) ÷ (r - g); where
- CFn = free cash flow in final year of forecast period
- g = perpetual growth rate
- r = discount rate
The perpetual growth rate is typically taken to equal the average long-term inflation rate or, at a maximum, the historical gross domestic product (GDP) growth rate.
Example: An investor wants to carry out a DCF over a 5-year period, coupled with a terminal value calculation from Year 6 onwards. We’ll assume the discount rate is 9% and the perpetual growth rate is 2%.
In Year 5, the investor estimates that the company will generate €100,000 worth of free cash flow. To calculate the terminal value of future free cash flows, the investor uses the Perpetuity Growth Method:
(€100,000 x (1+.02)) ÷ (.09 - .02) = €1,457,143
At the end of year 5, the value of the company’s future cash flows in perpetuity is worth a lump sum of €1,457,143. The investor then needs to discount this amount back to the present day:
(€1,457,143 ÷ (1+.09)5) = €947,058
The investor would add €947,058 to the present value of estimated free cash flows from Years 1-5.
Key Insight: The Perpetuity Growth Method is best for calculating the terminal value of mature, stable companies with predictable, long-term free cash flows that are expected to grow at a constant rate indefinitely.
The Exit Multiple Method ascribes a terminal value equal to the price that a company could be sold for at the end of the forecast period. To do this, investors look at what similar companies are being sold for as a multiple of key metrics like earnings before interest, taxes, depreciation and amortisation (EBITDA).
Example: An investor is carrying out a DCF over a 5-year period, coupled with a terminal value calculation from Year 6 onwards. The discount rate is 10%.
In Year 5, the investor estimates that the company’s EBITDA will be €200,000. Analysis indicates that similar companies are being sold for roughly 12x their EBITDA. To calculate the terminal value, the investor uses the Exit Multiple Method:
€200,000 x 12 = €2,400,000
The assumption is that, at the end of year 5, the company could be sold for €2,400,000. The investor then needs to discount this amount back to the present day:
(€2,400,000 ÷ (1+.10)5) = €1,490,211
The investor would add €1,490,211 to the present value of estimated free cash flows from Years 1-5.
Key Insight: The Exit Multiple Method is best for calculating a terminal value that’s based on real acquisition data from comparable companies. It provides a market-led valuation that swaps the assumption of infinite growth for that of market stability i.e. that the multiple will hold true in the future.
Reality Check: Terminal Value can make up between 50 and 80% of the estimated value of a business. Yet, it's highly sensitive to assumptions. A single percentage point change in either the discount rate or the perpetual growth rate in the Gordon Growth Model can result in large fluctuations in terminal value.
Even the Exit Multiple Method hinges on the business’ EBITDA in the final forecasted year, in addition to the assumed multiple. Both of these could be lower at a future point of sale which would significantly impact valuations.
Converting to Per Share Value
When the present value of the future free cashflows and terminal value have been added together, the final step is to divide this by the number of shares outstanding to get a fair value per share (FVPS):
- If FVPS is greater than the current stock price, the company could be undervalued
- If FVPS is lower than the current stock price, the company could be overvalued
Key Insight: Valuing future cashflows is highly subjective and isn’t a perfect science. The most subjective parts of the process are:
The future free cashflow projections
- The terminal value (TV) and the growth rate or multiple assumed
- The discount rate
- The discounting period
Additionally, as the risk-free rate is commonly set with reference to Government bond yields, it’s heavily influenced by interest rates set by policymakers, like the European Central Bank.
When interest rates rise, so too does the risk-free rate, and vice versa. As interest rates rise, present values of future cashflows will fall, leading to stock price declines. As interest rates fall, the opposite is true.
The higher the overall discount rate, the lower the present value of future cashflows and the lower the stock price. The lower the discount rate, the higher the present value of future cashflows and the higher the stock price. This is especially true for companies that are expected to earn most of their cashflow far in the future.
Other Valuation Methods
Three of the most common alternative or supplementary valuation techniques that investors can use when assessing the attractiveness of stock prices are:
Stock Price ÷ Earnings per Share (EPS); where
EPS = (Net Income - Preferred Dividends) ÷ Weighted Common Shares Outstanding
Example: Say a stock is trading at €10 per share. The company reports earnings per share of €2. The P/E ratio of this company would be:
€10 ÷ €2 = 5 P/E Ratio
That means investors are paying €5 for every €1 that the company earns. In other words, it would take five years at current earnings to recoup your initial investment. The higher the P/E ratio is, the higher the market's expectations are for future growth and the riskier the investment proposition becomes.
The P/E ratio is just one example of a financial ratio that can be used for comparable valuations between companies. It’s most effective when analysing profitable, established companies with consistent earnings.
The Dividend Discount Model (DDM), also known as the Gordon Growth Model (GGM), assumes that the present value of a stock is equal to the sum of its discounted future dividend payments. It’s calculated as:
D1 ÷ (r - g); where
- D1 = the expected dividend next year
- r = the discount rate
- g = the assumed dividend growth rate
To calculate D1, we need to take the current dividend (D0) and apply our assumptions about dividend growth i.e. D0 x (1 +g)
Example: Let’s say a company has just paid an annual dividend of €4 per share. Historically, the company has reliably increased its dividend by 4% each year. We’ll assume a discount rate of 9%.
Step 1: Calculate D1 - €4 x (1.04) = €4.16
Step 2: Apply DDM - €4.16 ÷ (.09 - .04) = €83.20
€83.20 is the assumed fair value per share of this company based on our expectations for future dividend growth and our required rate of return.
DDM is most effective when valuing well-established companies that have a history of paying a regular and meaningful dividend, like those found on the list of dividend kings and dividend aristocrats.
The Residual Income Model (RIM) assumes that the fair value of a stock is equal to its book value per share (BVPS) plus the present value of future residual income. Residual income (RI) is calculated as:
Net Income per Share - (BVPS * r); where
- BVPS = book value per share
- r = discount rate
Fair value per share under RIM is then calculated as:
BVPS + (RIn / (1+r)t) etc.; where
- RIn = residual income for the year
- t = the year
Example: Let’s say a company has a BVPS equal to €100. The expected net income per share next year is €15. We’ll assume the discount rate is 10%.
Step 1: Calculate Residual Income Per Share - €15 - (€100 * .1) = €5 per share
Step 2: Calculate Fair Value per Share - €100 + (€5 / (1.1)1) = €104.55
€104.55 is the assumed fair value per share of this company based on our expectations for future net income and our required rate of return.
This is a simplified example. In practice, investors would need to carry out a multi-period forecast for future residual income coupled with a terminal value, similar to a DCF model.
Key Insight: Residual income only prescribes value to profits that exceed shareholder expectations. If a company earns €12,000 on its assets of €100,000, i.e. a 12% return, but the investor’s discount rate is 10%, the true residual income is only €2,000 i.e. 2%.
In other words, residual income is the value that a company creates above and beyond the minimum return that was expected by shareholders when they originally made the investment.
RIM is most effective when valuing mature, asset-heavy companies. It is also used for valuing financial institutions, non-dividend paying companies and companies with volatile free cash flows.
Frequently Asked Questions
Buying a company’s stock gives you an ownership interest in one business. Buying an ETF’s stock gives you an interest in hundreds or thousands of businesses.
In most cases, your shares will become worthless and you’ll lose what you invested.
Stock prices are based on expectations. If a company reports strong earnings, but the market was expecting better, the price may fall. This can also happen if the company lowers its guidance or estimations for future earnings.
A reverse DCF, also known as reverse-engineered DCF, works backwards from a stock’s price to find the assumptions priced in by the market.
A forward P/E ratio compares a stock’s price to its expected earnings over the next 12 months.
A trailing P/E ratio compares a stock’s price to its earnings over the last 12 months.
A stock split increases the number of outstanding shares, reducing the price per share while keeping the company’s value the same. It’s typically done to attract new investors and increase trading volumes.
A reverse stock split decreases the number of outstanding shares, increasing the price per share while keeping the company’s value the same. It’s usually done to avoid delisting from stock exchanges, attract institutional investors or improve market perception.
No, the stock isn’t the company. Just because a share price is rising doesn’t mean the business is improving. Equally, when prices are falling, that doesn't mean the business is failing or getting worse.
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