Introduction to Stock Valuation

1. VALUATION OF STOCKS
MA. JOANA G. BARRION

2. •DEBT CAPITAL – INCLUDES ALL LONG-TERM
BORROWING INCURRED BY A FIRM
•EQUITY CAPITAL – CONSISTS OF LONG
TERM FUNDS PROVIDED BY THE FIRM’S
OWNERS, THE STOCKHOLDERS

5. ISSUING COMMON STOCK
THE INITIAL NONFOUNDER FINANCING FOR BUSINESS STARTUPS WITH
ATTRACTIVE GROWTH PROSPECTS COMES FROM PRIVATE EQUITY INVESTORS.
THEN, AS THE FIRM ESTABLISHES THE VIABILITY OF ITS PRODUCT OR SERVICE
OFFERING AND BEGINS TO GENERATE REVENUES, CASH FLOW, AND PROFITS, IT
WILL OFTEN “GO PUBLIC” BY ISSUING SHARES OF COMMON STOCK TO A MUCH
BROADER GROUP OF INVESTORS.

6. VENTURE CAPITAL
• VENTURE CAPITAL - PRIVATELY RAISED EXTERNAL EQUITY CAPITAL USED TO
FUND EARLY-STAGE FIRMS WITH ATTRACTIVE GROWTH PROSPECTS.
• VENTURE CAPITALIST - PROVIDERS OF VENTURE CAPITAL; TYPICALLY, FORMAL
BUSINESSES THAT MAINTAIN STRONG OVERSIGHT OVER THE FIRMS THEY INVEST
IN AND THAT HAVE CLEARLY DEFINED EXIT STRATEGIES.
• ANGEL CAPITALISTS (ANGELS) - WEALTHY INDIVIDUAL INVESTORS WHO DO NOT
OPERATE AS A BUSINESS BUT INVEST IN PROMISING EARLYSTAGE COMPANIES IN
EXCHANGE FOR A PORTION OF THE FIRM’S EQUITY.

7. GOING PUBLIC
WHEN A FIRM WISHES TO SELL ITS STOCK IN THE PRIMARY MARKET, IT HAS THREE
ALTERNATIVES. IT CAN MAKE
(1) A PUBLIC OFFERING, IN WHICH IT OFFERS ITS SHARES FOR SALE TO THE
GENERAL PUBLIC;
(2) A RIGHTS OFFERING, IN WHICH NEW SHARES ARE SOLD TO EXISTING
STOCKHOLDERS; OR
(3) A PRIVATE PLACEMENT, IN WHICH THE FIRM SELLS NEW SECURITIES DIRECTLY
TO AN INVESTOR OR GROUP OF INVESTORS.

8. 1. APPROVAL OF ITS CURRENT SHAREHOLDERS
2. CERTIFICATION THAT ALL DOCUMENTS ARE LEGITIMATE
3. FINDING AN INVESTMENT BANK WILLING TO UNDERWRITE THE OFFERING
4. FILING FOR A REGISTRATION STATEMENT WITH SEC
- PROSPECTUS - A PORTION OF A SECURITY REGISTRATION STATEMENT
THAT DESCRIBES THE KEY ASPECTS OF THE ISSUE, THE ISSUER, AND ITS
MANAGEMENT AND FINANCIAL POSITION.
- RED HERRING - A PRELIMINARY PROSPECTUS MADE AVAILABLE TO
PROSPECTIVE INVESTORS DURING THE WAITING PERIOD BETWEEN THE
REGISTRATION STATEMENT’S FILING WITH THE SEC AND ITS APPROVAL.
5. INVESTMENT COMMUNITY CAN BEGIN ANALYZING THE COMPANY’S PROSPECTS.

10. • FROM THE TIME IT FILES UNTIL AT LEAST ONE MONTH AFTER THE
IPO IS COMPLETE, THE COMPANY MUST OBSERVE A QUIET PERIOD.
• THE INVESTMENT BANKERS AND COMPANY EXECUTIVES PROMOTE
THE COMPANY’S STOCK OFFERING THROUGH A ROAD SHOW.

11. THE INVESTMENT BANKER’S ROLE
• FINANCIAL INTERMEDIARY THAT SPECIALIZES IN SELLING NEW
SECURITY ISSUES AND ADVISING FIRMS WITH REGARD TO MAJOR
FINANCIAL TRANSACTIONS.

12. SELLING PROCESS FOR A LARGE SECURITY
ISSUE

13. HOW TO INVEST IN STOCKS (FOR BEGINNERS)
1. SELECT YOUR INVESTING STYLE
• “I’M THE DIY TYPE AND AM INTERESTED IN CHOOSING STOCKS AND STOCK
FUNDS FOR MYSELF.”
• “I KNOW STOCKS CAN BE A GREAT INVESTMENT, BUT I’D LIKE SOMEONE TO
MANAGE THE PROCESS FOR ME.”

14. HOW TO INVEST IN STOCKS (FOR BEGINNERS)
2. LOOK FOR OPTIONS
• THE DIY OPTION: OPENING A BROKERAGE ACCOUNT
• THE PASSIVE OPTION: FINDING A BROKER

15. HOW TO INVEST IN STOCKS (FOR BEGINNERS)
3. KNOW THE DIFFERENCE BETWEEN STOCKS AND STOCK MUTUAL FUNDS
• STOCK (ALSO CALLED EQUITY) MUTUAL FUNDS OR EXCHANGE-TRADED FUNDS.
• INDIVIDUAL STOCKS

16. HOW TO INVEST IN STOCKS (FOR BEGINNERS)
4. SET-UP A BUDGET
• HOW MUCH MONEY DO I NEED TO START INVESTING IN STOCKS?
• HOW MUCH MONEY SHOULD I INVEST IN STOCKS?
5. START INVESTING

17. TIPS ON HOW TO INVEST ON STOCKS
• BUY WHAT YOU KNOW
- A PLACE TO START
- AVOID THE HYPE
• CONSIDER PRICE AND VALUATION
- KNOW WHAT KIND OF STOCK YOU ARE TALKING ABOUT
- CHEAP ISN'T ALWAYS GOOD, AND EXPENSIVE ISN'T ALWAYS BAD.

18. TIPS ON HOW TO INVEST ON STOCKS
• EVALUATE THE FINANCIAL HEALTH
- LOOK FOR REVENUE GROWTH
- CHECK THE BOTTOMLINE TOO
- KNOW HOW MUCH THE COMPANY HAS
- FIND A DIVIDEND

19. WHAT NOT TO DO?
• DON’T BUY ON ALONE.
• DON’T RELY TOO MUCH ON ANALYST RECOMMENDATIONS.
• DON’T BE SURPRISED BY VOLATILITY.
• DON’T FORGET TO SELL.