Equity Valuation Methods
Exam Weight: ~4 questions (3% of exam)
Valuation methods help determine whether a stock is overvalued, undervalued, or fairly priced. This unit covers the four main approaches used to assess equity securities.
What You'll Learn
- Technical analysis: price charts, trends, support and resistance, moving averages, and volume
- Fundamental analysis: top-down vs. bottom-up approaches, valuation ratios, and key financial metrics
- Dividend discount: valuing stocks based on expected future dividends, the Gordon Growth Model
- Discounted cash flow: valuing any company using projected free cash flows
The Big Picture
There are two broad schools of thought for valuing stocks: technical analysis (studying price patterns and trading volume) and fundamental analysis (studying the company's financials and economic context). Within fundamental analysis, specific models like the dividend discount model and discounted cash flow translate future cash flows into a present value estimate of what a stock is worth.
The exam tests whether you understand what each method does, what data it uses, and when it is most appropriate.