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How do I know whether I am paying the right price for the stock?

The price of a stock depends on demand and supply, growth potential and fundamentals of the company

04 Dec 2008

Here are some basic factors that determine stock value:

 

  • Demand and Supply: This is the bedrock of economics. And stocks aren't exempted. When the demand for a stock exceeds its supply (more buyers than sellers), a stock's price rises. And the opposite happens when there are more sellers than buyers. These are short-term market trends, however, and tend to get evened out over a longish period of time.

 

  • Growth Potential: The value of any stock can also be determined by the potential for growth if its industry sector, its promoters track record and such like. It is only natural that investors will be willing to pay a premium for the stock of a firm with rare growth potential in its revenue and net profits. And if this firm proves capable in sustaining potential growth numbers, the market will continue to give it high valuations.

 

  • Fundamentals: A company's future growth lives or dies on its business prospects and how good management is in taking advantage of existing opportunities. Management quality is crucial. Good management practices, responsible corporate governance and ethics, all point at a good buy of that company's stock.

 

Always remember, in the medium to long-term, a company stock is driven by the company's fundamental strength - its business potential, past performance, management competence, credibility of its promoters,...in short, that company's fundamentals.

 



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