When you look at the world of investment in its entirety, you will notice that there are several different categories of people who need to value stocks and use stock valuation techniques accordingly. Their motives range from picking the right stocks for investment for profit, the need to convey information about companies to the public as well as the need to provide better management to companies. It follows that there are different classes of people interested in stocks would require a better understanding of the methods of stock valuation whether you are an executive managing a corporation or a fund manager running a mutual fund.
Corporate managers have an understandable interest in valuing the stocks of their own company as a measure of their performance and their success in enhancing shareholder value. They will often have an interest in valuing the stocks of other companies whether as acquisition targets or as a partner in strategic joint ventures. Establishing the value of their own company stock enables them to make a number of long-term fund raising decisions. For instance, if they believe that their stock is undervalued, they may undertake stock buybacks in order to raise the value of their stock. On the other hand, if they believed that the stock is overvalued, it may be an opportune time to undertake a fresh stock offering.
Investment bankers have a unique role in the financial world which is to bring together companies with potential investors. For example, the company may require equity capital to undertake a major business expansion. The investment banker makes an evaluation of the company and offers recommendations as to the best way of raising the equity. He also undertakes to manage the offering of the securities and raise the necessary funds. An essential part of this process is to carry out a valuation of the company so that the offering price for the stock can be justified. Though the objective is not the same as other investment classes, many of the common valuation techniques are used.
Equity research analysts follow companies and industries on a long-term and full-time basis and are required to periodically establish valuations for the companies that they follow. In turn they make buy, sell and hold recommendations as guidance for both public and private investors. These recommendations often have significant influences on stock prices so it is essential that analysts use techniques that are objective and reliable.
Finally, proper valuation techniques are critical to individual and retail investors who would like to pick their own stocks. This can be quite difficult and time-consuming is essential for individual investors who are looking to beat the market. Naturally, there is nothing to stop individuals picking up information from other sources such as equity research analysts. However, a reasonable knowledge of the basic techniques will enable the retail investor to evaluate the recommendations of other people and to make the right investment decisions. The same considerations apply to asset managers who manage other people’s money. In their case, the ultimate objective is to provide returns in excess of a particular benchmark. If the asset manager underperforms consistently, his investors would be justified in moving their money to other asset managers.