Site menu

Generic filters

Generic filters

# The Difference Between Share Prices and Share Valuation

#### In this article:

The difference between price and value is an important concept.

In the words of the world’s most famous investor, Warren Buffett:

“Price is what you pay, value is what you get.”

Another great quote is:

“Price is what you are asked to pay, value is what you are willing to pay.”

Everyone’s assessment of value is different. For example, a \$1,000 iPhone might seem expensive to us, but you might think it is great value.

Typically, we buy an item or invest our money if value is greater than price.

## How is the value determined?

In finance, an asset’s value is determined by investors, analysts and economists using financial models. Some of the most common valuation models include:

• Discounted cash flow (DCF) analysis, which uses forecasts of free cash flow
• Ratio analysis (e.g. the price-earnings ratio)
• Arbitrage pricing theory (APT)
• Relative valuation (e.g. property one versus recent property sales in the area)

In investing, the final value is often called the ‘intrinsic value’. However, stock analysts also call these valuations their ‘price targets’.

### Consider this

The price of an investment can change by the minute or second, but the intrinsic value changes less frequently (e.g. the value of an iPhone changes less frequently than its price!).

## How do I value shares?

There are a number of different methods when it comes to valuing companies. These include:

• Ratio analysis
• Discounted cash flow (DCF) analysis
• Dividend discount models (DDM)
• Earnings power value (EPV)
• Internal rate of return (IRR); and
• Weighted average cost of capital (WACC)

To learn about each of these methods and how to use them, check out our free Valuation Course where we cover the nuts and bolts of valuation theory and application.

### Click here to start now — it takes less than 30 seconds to enrol!

Did you know Rask Education offers investing, budgeting, tax and finance courses? Here are the three most popular:

Absolutely no credit card or payment information required -- all you need is an email address!

#### Owen Raszkiewicz

Owen is the Founder of Rask, Lead Investment Analyst for Rask Invest and head educator at Rask Education. Prior to founding Rask, Owen was an investment analyst at the highly regarded managed funds research business Zenith Investment Partners and a Writer/Analyst for The Motley Fool Australia. Owen’s formal qualifications include a Master of Applied Finance and Master of Financial Planning from Kaplan Professional, Bachelor of Technology (Information Systems) from Swinburne University of Technology, Advanced Diploma of Financial Services (Financial Planning) and Diploma of Mortgage Broking Management. He's also completed level 1 of the Chartered Financial Analyst (CFA) program.

Share this post:

Budgeting
Read More »
Personal Finance
Read More »
Budgeting
Read More »
Budgeting
Read More »