Importance of Stock Valuation

                                                           Source: Adobe Stock


Everyone have heard and familiar with this well known Indian proverb or phrase -



"लोहार का एक हथौड़ा सुनार के 100 हथौड़ों के बराबर है l "

And if we try to co-relate this above proverb in stock market then we can say that Trading is like working as Goldsmith and Investment is like working as Blacksmith.

Trades daily try and try hard to generate profit and do trading more and more daily. 

Where as Investor do analysis and study more deeply before investment and do one time investment for long term.

No doubt everyone having their own working style and nature.

But the question here we are going to discuss is totally different? 

We all are working people and daily trading is very difficult for us. But we strongly required to build up our Passive income slowly slowly for our future when we are not able to work, while our Active income live or running.

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What is Active Income & Passive Income?

Active income is that income which we get in return of work we do,  here we need to work for income give our time and get money.

While Passive income is that income in which we need not work or remain present in the work place for getting money. Out investment work and earn for us. Passive income is very important in our old age when we are not able to work.

A very famous author Mr. Robert Kiyosaki have shown us a way where we should try to move our-self to generate our passive income

From above chart it is totally clear that, 

Just working as any employee we can't generate much passive income. Here we have to work for others and our time is equal to money and have no freedom for our-self.

As any Self employee (owning a shop or restaurant ) we have to work for our-self, but again our time is equal to money (profit may be more), here again we have to work any how to survive our self owned business and here also we have no freedom for our-self.
Money Vs Time
                                                                       Source :

Now as a Business owner (owning a company) other people are working for you but still you need to keep managing it. Here you need not to work but keep on managing the system.

Now the last one as an Investor, you only put your money in company/ shop or business managed by others.  You need not require to work. Other people and your money works for you. ie is real passive income where you wouldn't work but money and other works for you. You need not to manage any shop, company,system or business still you earn money by investing only.

One more example to understand the importance of passive income. 

There where two friends living in small village, in that village there was shortage of water for daily use. So they have to bring water from very long distance. Everyday they both friends go and bring 4 bucket of water since from childhood.
As they grown up their capacity to bring water increases. Out of this two friends one friend start bringing more water daily 6 buckets against the requirement of 4 buckets and go for two days instead of 3 days and rest for one day and enjoy, while second friend brings 4 buckets of water  or sometime 6 buckets of water and contribute some amount of his daily time to built pipe line from water source to his home.
After few years when their water carrying capacity reduced the first friend now able to bring only 4 buckets of water and also have to go daily to bring water. On other hand second friend have built a pipeline from water source to home by working daily slowly slowly on pipeline and now second friend need not to go bring water. 

For this example we can clearly understand that while our Active income is going on, we must focus and try to align our Passive income generation activities.

How to generate Passive Income?

So the question now arise that how can we generate passive income for our-self and how to become to go the quadrant of Investor with very little scope of earning and time to invest.

Now the question here is how to get overcome this problem of  time, investment and return.

There are various instruments where we can invest our current non required fund to grown in future for fulfilling our future requirements.

Like Saving, FD, MF, Gold, Property and Stocks.

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But above all instruments having there limitations of return, except the stock investments.

Stock is having very wide range for investment and can give unbelievable returns, if carefully select the stock for investment.

But the concern is that the stock investment is double edge sword, if not handled properly it will hit our-self and completely destroy us.

So the very first requirement is to understand 

Where to invest in stocks? How to select stock for investment?

Lets try to understand with example,

Suppose we are manufacturer of a cricket ball and after manufacturing and marketing / advertisement ball costs around for Rs.100. 

We sell this ball to wholesaler at Rs.100 and then wholesaler will sell ball to next retailer at Rs.120, Rs. 140 & Rs 160 down the level. 

But after that it is difficult to sale ball further at Rs.180  or Rs.200 to next level if we bought ball at Rs. 160. 

But if suddenly demand falls and no one is ready to buy ball at that time and we want to move our money out due to some emergency or urgency or of market condition, then we have sell that balls at same cost at which we have bought it or below  than the cost at what we have bought it like Rs. 140, Rs. 120 or Rs 100 and so on. 

And sometime if situation worsen then we have sell balls at further lower cost at Rs.80 or Rs.70 also in panic situation. But if we understand that as an when situation changes than the ball will again began to sell at  Rs .100 then we can hold it or if we have not bought it yet then we can bought it at this level of Rs.70 or Rs.80 at discount rate than definitely we can sell it Rs.100 at the profit of Rs.20 or Rs.30.

But for that we need to understand and learn to get know the original cost of ball manufacturing ie Rs.100. and if we know that the ball cost Rs. 100 we will definitely buy it at Rs. 80.

In same way in stock market stock price moves very high when everyone is very optimistic and market is happy and moves very down below original cost if everyone is very pessimistic and market is unhappy. And as soon as the situation stabilize then the stock price sudden moves to it original price. 

So if you have proper knowledge of how to do valuation of stocks than you definitely will workout for it and keep on watching for proper favorable level to buy and make good money buy investing in small small amount in those stocks which are currently below its original price.  And wait for sell at right price.

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But for all this we need to learn proper stock valuation or stock analysis. 

So that we can understand and plan, When to buy? Why to buy? What to buy?

Here come into picture the term stock analysis or stock valuation.

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What is investment? 

Investment is one which, upon thorough analysis promises safety of principal and an adequate return.

With this stock valuation we can plan proper entry and exit in stock with safety of principal and adequate return.

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What we do in stock valuation?

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In stock Valuation we do the thorough fundamental analysis of balance sheet and P&L statement. And from the past trend try to forecast the future trend with conservative growth rate.

With proper analysis and study we derive the target price level for next and discounted entry level of stock with handsome return.

We derive the entry and exit level of good fundamental stock and wait for right price for entry and wait for right price of exit.

Stock Analysis give us proper clear picture about stock, When to buy? Why to buy? What to buy?

 For the above it is very clear that after stock valuation of stock ABC, we got clear picture that when we have to entry in the stock and when we have to move out of stock ABC. 

Whether this stock is fundamental strong / good or not. 

what is the health of company upto now and what will going to happen in coming future if same trend followed by the company ABC.

If the entry price of Stock ABC is Rs 591.89 and exit price is Rs.710.26  then we have to wait till that price for our entry will reach ie like the example of ball, we have to wait till the ball discount price is Rs.80 reached against the actual cost of Rs.100.

Similarly way after learn this stock valuation we can do analysis of each and every stocks and chose out the right fundamentally good future prospect stock and wait for investment in them and earn good return without loss.


To work in stock market and to earn good return without loss for securing our future, we need to be more focused and disciplined in our investment selection criteria. We have to work hard and definitely be choosy. We need keep our eyes open and grab the favorable conditions, which is possible only if we are having proper knowledge of STOCK VALUATION. So, friend go for it and learn properly stock valuation wherever you can get it.

OK, Friends all the best!

Hope you enjoy this article also as the earlier articles.

Disclaimer : This article is only for knowledge and information sharing and not for any type of recommendation for investment. Do your own analysis before investment.

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