Series 66: Valuing Equity Securities

Valuing Equity Securities

In addition to the valuation of fixed-income investments, the exam wants you to understand the valuation of equity securities. How do analysts determine whether a stock is over- or undervalued? As we mentioned in Chapter 1, most analysts examine the fundamentals of a company to judge the value of the stock price. Fundamental analysts examine historical financial statements, looking for future trends. Do the income statements show that earnings are steadily growing? How stable are expenses? Relatively stable expenses with growing income often suggest a rosy outlook for a stock’s price. What are the profit margins like compared to other companies in the industry? An analyst will also look at the balance sheet to see how the business is financed. Is the company primarily financed by debt? If so, is this a problem for the future? Here