The ideal situation is the one when stock markets are appropriately valued, which Wolf (2008) identifies as an opportunity.He says that fairly priced stock markets are favoured by the investors and risk-seeking governments, as it is the situation with lesser uncertainty.Disclaimer: This work was produced by one of our expert writers, as a learning aid to help you with your studies.
The ideal situation is the one when stock markets are appropriately valued, which Wolf (2008) identifies as an opportunity.He says that fairly priced stock markets are favoured by the investors and risk-seeking governments, as it is the situation with lesser uncertainty.Disclaimer: This work was produced by one of our expert writers, as a learning aid to help you with your studies.Tags: Macbeth Essay Guilt ThesisEssay Helping An Old ManDissertation RulesEssay On Security Threats In PakistanN Essay Within A BookWhat Is Argumentative Research Paper
The KCE method, however, is specifically subjective if the analyst is interested in estimating the potential future earnings of an organization (Ujwary-Gil, 2014).
The Dividend Discount Model is based on the assumption that the price of a stock at equilibrium will be equal to the sum of all its upcoming dividend yields discounted back to its current value (Ivanovski, Ivanovska and Narasanov, 2015).
This is because financial analysts believe that factors such as the potential decline in the annual revenue growth, reduction in operating profit margins due to increasing technology, marketing and other costs, and increased investment in growth strategies, such as international expansion, need to be accounted for when valuing stocks.
It can thus be understood that overvalued stocks pose to be a threat for the financial markets because investors lose confidence, which results in a drop in revenue growth (Akbulut, 2013).
Some analysts estimate the stock markets to be slightly overvalued as compared to what their value should be.
Stock Market Essay
Rosenberg (2010) further strengthens this point in his research which revealed that stock markets are overvalued by 35%.
The price to earnings ratio is the most common method used to evaluate stock markets, whereby the company’s current stock price is compared with the predicted earnings it will yield in future (Stowe et al., 2008).
Knowledge Capital Earnings – KCE is another method through which a company’s intellectual capital can be gauged and interpretation of the extent to which it is overvalued can be given (Ujwary-Gil, 2014).
While different authors argue that every evaluation metric has its merits and demerits, which makes it difficult to conclude whether stock markets are overvalued when calculated via a specific metric, a Phoenix (2014) report provides evidence of the fact that stock markets are overvalued by almost every metric used for valuation. stock market which is analysed to be overvalued by 55% (Lombardi, 2014), while it is estimated to be overvalued by 80% according to another research (Heyes, 2015).
According to Autore, Boulton and Alves (2015), short interest rates are also a determinant of stock valuation; the lower the short interest rate of the initial stock, the more overvalued the stock will be. Lombardi (2014) identifies it to be overvalued to such an extent due to the increasing presence of bullish stock advisors as compared to bearish advisors, which results in the investors being complacent without being anxious about a huge market sell-off.