Risk Management in Stock Valuation and Markets Essays

Risk Management in Stock Valuation and Markets Essays

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Introduction
Investor’s investment decisions are based on the valuation of stock which they conducted before making the decision. Generally investors prefer to invest in the undervalued stocks and sell their holding of stocks that they considered to be overvalued. There are many different methods of stock valuation. In addition, there are many factors which increases the risk related to the valuation of the stocks. This paper focuses on the fundamental analysis used for the valuation of the stocks. Fundamental analysis generally use the price earning method, dividend discount model, or free cash flow model for the valuation of the stocks. On contrary to it, we focus on the factors which affect the stock market and valuation of the stocks.
Basic terms
Stock
Stock is a security that represents holding in a company and signifies a requisition on the company’s assets and profits ("stock,").
Stock market
Stock market is a market in which public companies issue or exchange their shares. Stock market is also known as the equity market. Stock market is an crucial part of economy as it provide opportunity for the companies to receive capital from investor in order to give them a part of ownership of the company ("stock market,").
Market risk
Market risk refers to the risk in which the possibility of an investor to face losses as a result of some factors that influence the performance of the financial market. It can occur in the situation such as recession, fluctuating interest rates ("market risk,").
Methods of stock valuation
Price-earnings method
Dividend discount model
Free cash flow model
Price earning model
Price-earning (PE) ratio is relatively easy method of stock valuation. It is based on the expected earning instead of recent ea...


... middle of paper ...


...ets, Institutions & Money, 22, 1202-1216.
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Schwert. (2011). Stock volatility during the recent financial crisis. European Financial Management, 17(5), 769-805.
Madura, J. (2011). Financial markets & institutions. (9 ed., pp. 263-293). Cengage Learning Co.
stock. (n.d.). Retrieved from http://www.investopedia.com/terms/s/stock.asp
stock market. (n.d.). Retrieved from http://www.investopedia.com/terms/s/stockmarket.asp
market risk. (n.d.). Retrieved from http://www.investopedia.com/terms/m/marketrisk.asp
required rate of return - rrr. (n.d.). Retrieved from http://www.investopedia.com/terms/r/requiredrateofreturn.asp
Harper, D. (2010, 09 04). Using historical volatility to gauge future risk. Retrieved from http://www.investopedia.com/articles/06/historicalvolatility.asp

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