The Fundamental Value

When you buy something in every day life, the first thing you do is to compare the value of the product with the price that you have to pay for it.  For example, you would never buy a house without having a good idea of its value. However, in the world of investing most people buy stocks without knowing the current fundamental value of the stock. As a result, stock prices are often very different from the stock’s current fundamental value. Sometimes stocks list at an inconceivably low price compared to their value and at other times they list way above their value. The under- and overvaluation of stocks is particularly exaggerated by investors’ herd instinct and the general mood on the stock market.

React calmly

Therefore, in order to do well on the stock market you first need to know the value of the stocks in order to buy low and sell high based on that value.  If you know the current value of a stock and have a good idea of its probable future value, then you can also react more calmly when prices tank during a panic or if they climb to inconceivable highs during a market state of euphoria.

Buying low and selling high

However, you never know how far a stock will rise or how low it will fall. If you know the value of a stock then you do know when it is listed too low and is worth buying and you know when it is listed too high and should be sold.  This is the only basis upon which you can systematically buy low and sell high and realize the largest possible profit.

Even when things sometimes happen unexpectedly that significantly alter the value of a stock and in some cases lead to a loss, systematically buying when a stock is listed too far under its value and selling whenever it lists too far above its value still leads to the largest possible profit on the stock market. Such unexpected events that lead to losses should be viewed as exceptions that validate the rule.

The Future Profit Potential

In order to make an optimal investment you not only need to know the value of the stocks but you also need to bear in mind the patterns, truths and certainties cited below. The emphasis, however, should still be on the intrinsic ability of a company to realize profits in the future. The intrinsic ability of a company to realize profit in the future (the Future Profit Potential) is the most evident basis upon which to determine the value of a stock. It is also the foundation for successful stock trading.

7 evident truths that matter when investing on the stock market

Key data of a company