A Trader's Guide To The Art Of Determining Value
Hey folks. This has so far been a solid week for my main account. I’ve passed the $50k mark on the month and just came off a nearly $10,000 day.
Given that influx of green, I thought I would take this week’s article to talk briefly about value and valuation. Those terms are loaded with a whole array of definitions and connotations. For starters, let’s take the definition of valuation as the pros at Oxford’s online dictionary define it:
noun
1. An estimation of the worth of something, especially one carried out by a professional valuer.
What grabbed me about this particular definition is its emphasis on a “professional valuer” as determining worth. Of course, in some instances, the opinion of experts is by far the best way of setting price. Take auctions as an example, before a live auction takes place, the auctioneers will have had the items up for bidding appraised in order to establish a baseline price from which to start.
This obviously goes for trading as well. Upon launching an IPO onto a major exchange, companies generally hire an underwriter to value the company’s assets and liabilities, along the lines of its book value, and gauge investor interest to arrive at a price that reflects those evaluations. Similarly, market, sector and industry analysts with a strong track records at times have more influence on a given stock’s price moves than the company’s executives. Further, those valuations are formed from earned knowledge of how a certain industry works and what factors within a company’s balance sheet or in the economy might serve as an unrecognized asset.
However, the other important part of the above definition is the word estimation. Returning to the auction metaphor, online auction sites like eBay Inc. (NASDAQ: EBAY) provide bidders an open marketplace from which to choose the best value on an item. For anyone who’s sold anything on eBay, you know that a professional evaluation holds a lot less water when there are dozens of other sellers looking for that same price. Valuation in that sense, the actual price at which you will buy or sell a stock, means that the act of transacting a trade relies heavily on a trader’s own sense of value.
For day traders like myself, valuation works like a blend of those two venues. The market is a controlled environment in as much as institutional and sell-side analysts set broad price targets that cause broad movements in price, but the execution of individual trades allows each trader to, in a sense, shop around for their preferred price via limit orders.
Successful traders are able to gauge when the larger movements of a stock present a price range that aligns with their own convictions on a stocks short-term value, usually putting them in a short-term watch list. While the idea of value is different from trader to trader (a swing trader will see higher value in a stock that’s shown momentum than would a value trader, who’s looking for stocks from companies focused on growth) picking and holding to buy and sell price that fits with your trading style is a critical part of consistently finding an upside.
Disclosure: Warrior Trading is an editorial partner of Benzinga.
See more from Benzinga
© 2018 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
