You can use several methods to determine the fair value of a stock. Throughout the following sections, I discuss three of the more popular methods of determining the right price for a stock:

• Fundamental analysis
• Technical analysis
• Market timing

Valuing securities is important to your financial health. Stocks are more difficult to value than bonds. Bonds have a limited life and a stated payment rate. Common stocks don’t have a limited life or an upper dollar limit on cash payments. This uncertainty makes stocks harder to value than bonds. Common stock can be valued in a number of different ways, but overall, the value of a stock is the present value of all its future dividends. However, common stockholders aren’t promised a certain dividend each year. The dividend is based on the profitability of the company and the board of directors’ decision to pay dividends to stockholders. The second source of return for a stock is the increased market price of the stock. If the company decides not to pay dividends and reinvests profits in the firm, the company’s future profits and dividends should grow. This additional value should be reflected in a stock price increase in the future.

Fundamental analysis seeks to determine the intrinsic value of securities based on underlying economic factors. It’s the most widely accepted method for determining a stock’s true value, which you can then compare to current prices to estimate current levels of mispricing. Fundamental analysts usually forecast future sales growth, expenses, and earnings.

Using online tools to value stocks

You can visit the following Web sites for more about fundamental analysis and valuing stocks:

Global Value Investing with Stock Valuation (www.numeraire.com/ index.html) offers an article that illustrates why stock prices and stock screens are different from stock valuation. You also find an online discount cash flow valuator. The valuator uses models based on intrinsic value for the valuation of common stocks and other investment assets. That is, the model uses the discounted cash flow approach for determining fair market value. Results are shown in text, tabular, and graphical formats.

Stockworm (www.stockworm.com) was developed several years ago by several academics who were interested in investing and the financial markets. It offers stock analysis, customizable technical charts, stock screeners, and portfolio management strategies. Stockworm offers three levels of subscriptions and a free two-week trial. Analyst membership is $7.95 per month for stock valuations, comparisons to industry averages, and technical trading signals. A Manager membership is $14.95 per month for everything in the Analyst level plus advanced stock screeners and portfolio tracking. Autoinvestor is $29.95 per month and includes everything on the previous levels and is geared for investors who want the next level of automating portfolio buy/sell recommendations. Investors configure rulebased strategies for long or short selling (for example, buy a stock if it is in the top 20 results of the screener) and receive daily alerts.

ValuEngine.com (www.valuengine.com) was developed by Yale University’s Dr. Zhiwu Chen and his team of experts. ValuEngine is a proprietary model for valuing stocks. ValuEngine products include the stock valuation model (which determines the fair value of stocks), the ValuEngine stock forecast model (which forecasts the value of stocks), the ValuEngine portfolio forecast model (which predicts the likely return of a portfolio), and the ValuEngine Portfolio Advisor Model (which suggests ways to maximize the future gains of a portfolio). There are no charges for stock valuations. Premium membership is $24.95 per month with a free seven-day trial. Subscriptions include delayed quotes, portfolio functions, portfolio optimization, advance screening, detailed stock analyses and forecasting, multistock comparisons, research by analysts, and benchmark portfolios.

ValuePro (www.valuepro.net) was developed by finance professors to complete stock valuations based on discounted cash flow. The latest improvements include the ability to download data. The financial valuation software, which is $44.95, allows you to download data from the ValuePro Web site to your computer and to use the ValuePro software to analyze your investments. You can also use the ValuePro Online Stock Valuation Service at no charge. The Online Valuation Service looks up valuation inputs from the SEC EDGAR database and other free sources. The online valuation model uses quarterly and annual income statements, balance sheets, and cash flow statements to calculate the ratios. The calculations are based on observed historical data. (You can see how yearly data is used for the outcome.) The model also attempts to look up data regarding analyst estimates about growth rates. The model then combines these inputs by using the discounted cash flow valuation method to come up with a baseline intrinsic value for a stock. You can alter the 19 variables to update stale data and to fine-tune your long-term fundamentals.

Technical analysis is the study of all the factors related to the supply and demand of stocks. Unlike fundamental analysis, technical analysis doesn’t look at underlying earnings potential of a company when evaluating a stock. In contrast, technical analysis uses charts and computer programs to study the stock’s trading volume and price movements in hopes of spotting a trend. Overall, technical analysts don’t care about a company’s fair market or intrinsic value. According to Block and Hirt (1999), technical analysis is based on several assumptions:

Market value is based solely by the interaction of supply and demand.

Stock market prices are likely to move in trends that persist for long time periods. However, there may be some minor fluctuations.

Reversals of trends are caused by changes in demand and supply.

Demand and supply shifts can be detected sooner (or later) in charts.

Chart patterns often repeat themselves.

Technical analysis focuses on stock data analyses and stock market statistics. Analysts generally utilize a series of mathematical measurements and calculations designed to monitor market activity. Among other things, actual daily, weekly, and monthly price fluctuations are analyzed. Technical analysts are searching for early indicators of pattern changes to capitalize on. Trading decisions are based on signals generated by charts, manual and online calculations, computer programs, or their combinations.

If you’re an investor who uses technical analysis, check out these Web sites:

ClearStation (www.clearstation.etrade.com) offers customizable charting tools to illustrate the basics of technical analysis. Color-coded trends and standard charts are provided when you type in a ticker symbol. For beginners, explanations of technical analysis methods are illustrated with real-life examples.

Investtech.com (www.investtech.com) provides daily updated analyses and recommendations of more than 15,000 stocks in Europe and the U.S.A. This Web site is by subscription only. Analyses include trends, price patterns, and support and resistance levels. A written interpretation of each chart is also provided. You also find a model portfolio and a top 50 list with the most interesting stocks. For examples of reports and subscriptions prices, check the Web site.

ProphetNet (www.prophet.net), with your free registration, provides you with basic service. Basic service includes 40 years of interactive charting, 20-days of intraday data for each security, the ability to save two chart styles, 24 technical studies, five custom sets, draw/save trendlines, access to watchlists, flip charts, two portfolios with 100 transactions per portfolio, risk/reward analyses, delayed market data, and 30 results for your chart toppers market scans. You can also create and edit notes. The bronze level is $14.95 per month (or $149.50 per year). The bronze level includes access to everything in the basic level plus quotes, java-charts, snap charts, watchlists, portfolios, delayed streaming intraday charts, Marketmatrix streaming quotes, chart toppers market scans, Prophetscan real-time custom scanning, mini-charts, and notes. The next two levels include more bells and whistles. The silver level of service is $24.95 per month (or $249.50 per year), and the gold level of service is $39.95 (or $399.50 per year.) You can take advantage of a seven-day free trial. See the Web site for details.

Technical analysis software Technical analysis requires large amounts of information (usually historical price and volume data) that you can manipulate with technical analysis software programs. Some programs are designed for different types of securities and for specific indicators and markets. Additionally, some programs are designed for beginners, while others are for professionals. Here is a short list of available programs:

Equis MetaStock (www.equis.com) offers MetaStock Professional, which analysts sometimes refer to as the granddaddy of technical analysis software, for $1,695. (See the Web site for details.) The Web site includes back issues of the Equis newsletter, as well as files of tips, system tests, and custom formulas for use with the software.

Insider TA (www.stockblocks.com) uses box charting to highlight each trading period’s volume and high and low prices. Insider TA costs $129 for the Standard version and $229 for the Pro version. A downloadable demo is available at the Web site.

Stable Technical Graphs (www.winterra.com) is a Windows-based program that analyzes stocks, bonds, commodities, mutual funds, indexes, and options. Stable Technical Graphs costs $59.95 and offers a downloadable full product version for a 30-day trial.

VectorVest (www.vectorvest.com) uses fundamental valuation and technical analysis to rank more than 8,000 stocks each day. Stocks are ranked for value, safety, and timing, and VectorVest gives a Buy, Sell, or Hold recommendation on every stock, every day. Go to the Web site to sample the program. Just enter the ticker symbol of the company you’re analyzing. The special trial offer is for five weeks and costs $9.95. Subscription prices vary.

Market timing The underlying theory of market timing is that you purchase stocks when prices are low and sell when prices are high. The market timing strategy is based on reams of historical data that are used to discover patterns and relationships that affect investment returns. Market timing software uses this data to detect or anticipate changes in market patterns. Market timers note that the market can underperform for long periods of time. This low performance can reduce returns for buy-and-hold investors who decide to go ahead and sell before the next upswing. In contrast, market timers attempt to time the purchase and sale of their securities to coincide with ideal market conditions based on their predictions market cycles. The biggest problem with market timing is the need to predict when to get into the market and when to get out of the market (in addition to ensuring that the timing strategy will make enough increased returns to offset trading costs). A buy-and-hold strategy makes certain that the investor is in the market for the days with the biggest gains. Market timers may be out of the market during these times. For more information about market timing, check out FirstCapital Corporation (www.firstcap.com).