How to find a Stock's Right Price?
4.1 What is the Right Price of a Stock?
WHAT IS MRP?
MRP is the maximum price we should pay for a stock to get our expected rate of return. At MoneyWorks4me we use Cost of Equity of a particular stock as a proxy for required rate of return for the stock. When we buy a product we check the Maximum Retail Price (MRP) printed on it and do not pay more than that. In stock investing, MRP is a measure of the real worth of the share. This is the price above which we should consider selling the share.
WHAT IS DISCOUNT PRICE?
Discount price is derived by deducting the Margin of Safety from the MRP.
The Value Investing Guru Benjamin Graham insisted on a 50% margin of safety. When we calculate the Margin of Safety, we take various factors into consideration, such as exchange rate fluctuations, management credibility etc. which affect the company. When these risks are higher, we would like to buy shares at a heftier discount on the MRP. The Stock Market does provide opportunities to buy at heavy discounts; however we need to patiently wait for the right moment.
Expected Rate of Return
This is the compounded annual rate of return you want from your stock investment in the next 5 years. We calculate the expected rate of return based on the inherent risk in investing in the company. When you invest in a company where the risk is high, the returns you expect are also high and vice-versa. Hence the expected rate of return varies with the inherent risk in investing a company.
To get the MRP and Discount Price, MoneyWorks4me has a unique PRICE CALCULATOR:
PRICE CALCULATOR - a unique tool designed by MoneyWorks4me - provides you the sensible buy and sell price for a selected company.
It provides you the MRP and DISCOUNT PRICE for a stock after thorough quantitative as well as qualitative fundamental analysis by a team of expert analysts.
In the short term stock prices are affected by market sentiments and availability of money. So we suggest you to take a sensible discount on the MRP and buy the stock at the Discount Price or anything below that.
To sum up, DISCOUNT PRICE is the sensible BUY price and MRP is the sensible SELL price of a stock.
To understand how MoneyWorks4me arrives at the MRP and Discount Price of the stock of a company click on the links below-
4.2.1. Valuation for a company
4.2.2. Valuation for a bank
Want to do your own Valuation? Click on the link-
4.3 How can you do your own Valuation?