Share Valuation:
Fundamental analysis is based on the premise that each share has an intrinsic worth or value which depends upon the benefits that the holder of a share expects to receive in future from the share in the form of dividends and capital appreciation. The investment decision of the fundamental analyst to buy or sell a share is based on a comparison between the intrinsic value of a share and its current market price. If the market price of a share is currently lower than its intrinsic value, such a share would be bought because it is perceived to be under priced. A share whose current market price is higher than its intrinsic value would be considered as overpriced and hence sold.
The fundamental analyst believes that the market price of a share is a reflection of its intrinsic value. Though, in the short run, the market price may deviate from intrinsic value, in the long run the price would move along with the intrinsic value of the share. The investment decision of the fundamental analyst is based on this belief regarding the relationship between market price and intrinsic value.
The market price of a share and its intrinsic value are thus the two basic inputs necessary for the investment decision. Market price of a share is available from the quotations of stock exchanges. The intrinsic value is estimated through the quotations of stock exchanges. The intrinsic value is estimated through the process of stock or share valuation.
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