Corporate Finance For Dummies, 2nd Edition
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Corporate analysis is one of the primary methods of determining the value of stock because the value of the underlying company contributes strongly to the value of the stock. Don’t be confused; the actual price of the stock is different from its value, and whether you prefer to watch the value of the company or the price of the stock will depend a lot on your investing strategy.

High-frequency traders tend to watch stock prices more than the value of the underlying companies, whereas value investors, as you can probably guess, tend to watch the value of the underlying company because they’re looking for stable long-term performance.

A number of different methods are used to analyze corporate performance. The nice thing about corporate performance is that even though a stock’s price may fluctuate wildly, both up and down from an average, often these fluctuations are related more to the behaviors of the stock market than to anything inherent in the stock or the company.

So, by looking at the corporation rather than the stock, you can get an idea of whether the company itself has quality and value, and whether the stock appears to be priced too high or too low compared to the value of the company.

In the long term (over the course of years), the price of a stock tends to float around the assessed value of the corporation, coming down eventually if it’s too high or getting recognized eventually if it’s a good bargain, driving prices back up again.

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Michael Taillard, PhD, MBA, owns and operates OPII Schools, an award-winning national private school and tutoring company designed as a philanthropic experiment in macroeconomic cash flows as a form of urban renewal.

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