Anybody knows that you can find the price of the stock by looking at the stock ticker. These prices are not set in stone but fluctuate continuously throughout the trading day depending on demand and supply and the interaction of buyers and sellers. Valuations are much more complicated because every investor has his own valuation approach where perspectives can differ widely. This means that one investor may consider a stock worth buying while another may be considering selling the same stock. It is this difference that leads to active stock trading and provides buyers with sellers and vice versa. If all investors had the same perspective, they would all be buying or selling at the same time.
The stock market does not employ any valuation methods and prices fluctuate depending on trading conditions. This is why there is no single correct method of stock valuation and there will always be the difference between market prices and stock valuations. If you are a trader, you will buy or sell stocks in the short-term to profit from these differences. If you are a long-term investor or a buy and hold investor, you will tend to buy stocks that appear to be undervalued and then hold them until prices adjust over a period of time. If you are neither but are working on hot tips, you are likely to lose money. Any form of trading requires rules, a proper method and lots of discipline.
There are many different methods of valuation that are available and you should stay with the one with which you feel most comfortable. You may also use a second method to cross check the valuation arrived at by the first method. You should regularly establish the value of your stock holdings vis-à-vis the share price to manage your investment decisions. Generally speaking, you would probably do this by using the latest financial information to analyze the company. However you should also be aware that there are non-financial factors to be taken into account to prevent losing out if one of these factors causes a sharp movement in price.
The most important factor is what may be described as a company catalyst. This is a factor that changes the fundamentals of the company and may or may not be connected with the industry in which the company operates. Examples of internal catalysts include hot new product offerings or failures in existing products, the entry or the exit of outstanding managers and large gaps between earnings expectations and actual earnings. The catalysts affecting industries as a whole are merely broader versions of these.
For instance, the popularity of Apple iPads could have a negative impact on manufacturers of book readers such as Amazon but a hugely positive effect on the overall sale of digital books. It then becomes a question of judgment to assess the overall impact on the business of Amazon or Barnes and Noble. Similarly, the introduction of any hot new product or service or the induction of an outstanding new management team can have significant impact on stock valuations and prices. In addition, therefore, to the number crunching, you should try and adjust your valuation for intangible factors.