A great business is not always a great investment —
price matters.
Valuation helps you decide whether a stock is cheap, fair, or expensive relative to its business quality.
What Is Valuation?
Valuation is the process of estimating:
- What a company is worth
- Whether the current market price makes sense
📌 Markets quote prices, not values.
Price vs Value
- Price: What you pay today
- Value: What the business is worth based on fundamentals
📌 The gap between price and value creates opportunity — or risk.
Common Beginner Valuation Tools (Concept Only)
1️⃣ Price-to-Earnings (P/E)
- How much you pay for ₹1 of earnings
- Useful for stable, profitable companies
📌 High P/E is not bad — if growth justifies it.
2️⃣ Price-to-Book (P/B)
- Compares market price to net assets
- Useful for banks and asset-heavy businesses
📌 Low P/B doesn’t always mean cheap.
Overvalued vs Undervalued (High Level)
- Overvalued: Expectations too optimistic
- Undervalued: Business quality ignored or misunderstood
📌 Buying a great company at a bad price is still risky.
Common Valuation Mistakes
- Using valuation alone without business quality
- Comparing unrelated companies
- Assuming cheap stocks are safe
- Ignoring future growth
Key Takeaway
Valuation is about paying a sensible price, not finding the cheapest stock.
👉 Next: Lesson 10 – Red Flags & Common Mistakes