Financial Valuation

How to figure out what something is worth

Valuation is the technique of estimating something’s worth. One of the secrets of the wealthy is that they know how to value income producing assets.

One way worth can be determined is at auction, where people bid and the highest bidder wins. But how do bidders know how much to bid and how much is too much?

The stock market is an auction where investors place bids: how much they are willing to pay for a stock, and asks: how much an investor is willing to sell for.

A share of stock is essentially a stream of future cash flows. Each investor is intuitively, or through analysis, estimating the present value of that stream of cash. The price of the stock at any given moment is the cumulative guesses of all those investors. It is based on The Wisdom of Crowds.