The Advantages of the Appraisal Method for Stocks
Original post by Dennis Hartman of Demand Media
One of the fundamental activities involved with investing is trying to determine the real value, and likely future value, of a given investment opportunity. While there are many methods that address this problem, the appraisal method is one that has specific advantages over others. The appraisal method examines a business to provide an in-depth analysis of its operations and fiscal health, and how they affect stock prices.
Depth of Examination
One of the key advantages of the appraisal method for stock investors is the fact that it takes into account all aspects of a specific business. Instead of relying on the data from financial reports or other opinions from economists and industry analysts, an appraisal uses new data and places one individual (the appraiser) at the center of a full investigation. The appraisal method results in professional opinions on businesses that allow investors to target individual companies rather than investing in general industries or sectors of the economy.
Focus on Growth
Besides focusing on individual business rather than broad industries, the appraisal method for valuing stocks focuses on profit potential and the ability of a business to grow in the future. These factors are especially important for investors, who have different expectations regarding the duration of their investments and the return on their investments. A business appraisal focuses on growth by studying a business's strategy, including plans for expansion and ability to control costs. Investors can track an appraisal's accuracy over time by comparing actual growth to an appraiser's forecast growth.
The appraisal method for valuing stocks can incorporate multiple valuation methods and techniques, which gives appraisers flexibility in examining different types of businesses under different economic and market conditions. The asset method and cost approach are accounting techniques that look at how much a business paid for its assets, and how much they would be worth if sold today. The income method disregards assets and instead focuses on a business's recent and near-term earnings expectations. The market method compares a business to similar companies, extrapolating value estimates based on real numbers for a comparable organization.
Investors who use the appraisal method to determine which stocks to buy and which businesses to avoid have the benefit of institutional standards to stabilize and organize the data they need use to make decisions. Groups such as the Institute of Business Appraisers and the National Association of Certified Valuation Analysts publish their appraisal standards and provide guidelines for professionals in the field. This ensures that, even though an appraisal is an opinion, it uses data-based methods and follows the same formulas as other appraisals that an investor may also be considering.
- Business Appraisal: Appraisal Principles
- Nebraska Business Development Center: Nebraska Business Valuations
- Wake Forest University School of Law: Chapter 5 - Business Valuation
About the Author
Dennis Hartman is a freelance writer living in California. His work covers a wide variety of topics and has been published nationally in print as well as online. Hartman holds a Bachelor of Fine Arts from Syracuse University and a Master of Arts from the State University of New York at Buffalo.
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