As you know from our prior discussion, fundamental analysts believe that, at any time, there is
a basic intrinsic value for the aggregrate stock market, various industries, or individual securities
and that these values depend on underlying economic factors. Therefore, investors should determine
the intrinsic value of an investment asset at a point in time by examining the variables that
determine value such as current and future earnings or cash flows, interest rates, and risk variables.
If the prevailing market price differs from the estimated intrinsic value by enough to cover
transaction costs, you should take appropriate action:You buy if the market price is substantially
below intrinsic value and sell if it is above. Investors who engaged in fundamental analysis
believe that, occasionally, market price and intrinsic value differ but, eventually, investors recognize
the discrepancy and correct it.
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