LIMITATIONS OF STOCK PRICE VALUATION BY CLASSICAL METHODS: CRITICS OF THEIR RELIABILITY AND INFLUENCE OF BEHAVIORAL FINANCE
When trying to figure out which valuation method to use to value a stock for the first time, most investors will quickly discover the overwhelming number of valuation techniques available to them today. There are the simple to use ones, such as the comparable method, and there are the more involved methods, such as the discounted cash flow model besides all of them have their own problems and limitations as well as impacted with behavioral finance. Companies have an intrinsic value, and that intrinsic value is based on the amount of free cash flow they can provide during their effective lifetime. Money later is worth less than money now, however, so future free cash flows have to be discounted at an appropriate rate. The theory behind most stock valuation methods is that the value of a business is equal to the sum value of all future free cash flows. All future cash flows are discounted due to the time value of money. If you objectively know all future cash flows of a company, and you have a target rate of return on your money, then you can know the exact amount of money you should pay for that company. Preparing the work, the following methods were used: Systematic analysis of the scientific literature; Comparative analysis; Systematization, comparison and summarizing of the results. Behavioral Finance in the theoretical plane based on a cumulative and develop the institutional framework and practical manifestations become increasingly important element-catalyst for the development of financial markets. Unfortunately, there is no one method that is best suited for every situation. Each stock is different, and each industry sector has unique properties that may require varying valuation approaches. In this article we structure and compare different methods, their strengths and weaknesses.
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