How to Identify Undervalued Stocks and Overvalued Stocks Article

 Golden Investment Research Private Limited

How to Identify Undervalued Stocks and Overvalued Stocks

An investor should use the fundamental value concept in order to determine the right intrinsic of the stock’s value – Determine if the stock is undervalued or overvalued.

The stock is considered to be undervalued stock if it is being sold at a price below its assumed intrinsic value. Undervalued stocks convey the meaning that an investor should buy at a low price and sell at high price in stock market. A stock is not considered undervalued if it is being sold at low price but if the stock is compared with the stock of similar kinds and its price is found to be cheaper then those stocks it will be considered as an undervalued stock. The stock is considered to be overvalued stock if the current price of the particular stock is higher than the intrinsic value of that particular stock in the stock market.

An investor’s investment is considered to be successful if he is able to identify the undervalued stock and buys them at that rate and after sometime when the right time comes and the price of that particular stock becomes high he should sell that stock in order to earn high profits. An investor should use the fundamental value concept in order to determine the right intrinsic of the stock’s value.

Undervalued stocks prove to be a boon for investor’s portfolio. If the price earning ratio of the stock is low then it is just a simple indication for an investor that the stock is undervalued. This is not the only factor for determining the undervalued stocks rather it is just one of the technique that will help an investor to buy that particular stock. The investors who are the beginners in the stock market investment should try to add these undervalued stocks to their portfolio so that they can play safe and are able to earn suitable profits in beginning. 

Those companies which are giving consistent performances since past few years but the prices of their stocks are low indicate that the stock of the company is undervalued. If the stock is trading at low volumes is also one of the other indications for an investor that the stock is undervalued. An investor can also calculate the high net profit margins of a particular stock in order to see that whether the stock is undervalued or not. One of the easiest methods which can be brought into action to evaluate the undervalued stocks is the screener software program which helps them to tell top stocks which they should buy.

There are many ways from which an investor can determine that the stock has been overvalued. Price earning ratio of the stock is the first thing which help in determining the overvalued stock. If currently the price earning ratio of a stock exceeds the price earning ratio of that stock in the past it is considered to be overvalued stock. Other things which help an investor in determining the overvalued stocks can be listed as:

a) Dividend ratio of the stock
b) projected earnings of the stock
c) Intrinsic value of the stock
d) Last but not the least cash of the company flows also help in determining if the stock is overvalued.

Overvalued stocks are considered as a curse for an investor because it detrimental the investor’s portfolio. Some of the techniques which are used to know if the stocks are overvalued can be as:

a) the current price earning ratio which is available on every internet site is a clear indicator that if the stock is overvalued or not because it will tell an investor that how much money an investor is paying for every rupee he is earning with respect to that particular stock.

b) Try to determine some of the stocks in the market and have a look at price earning ratio of some renowned and popular stocks in the industry. An investor will find out that most of these popular stocks share the same price earning ratio. If you are looking for a stock of the same category and the price earning ratio of that stock is above average that means that the stock is overvalued.

In order to conclude this article we can say that undervalued stocks help an investor to gain more from lower investments and on the other hand overvalued stocks neither help him in earning profit rather they loose their actual investment money also.

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