Stocks: Valuations

Oscar Wilde famously defined a cynic as "a man who knows the price of everything and the value of nothing." When it comes to stock valuations, investors can be forgiven for fitting Wilde's definition of cynical. In the stock market, there are countless ways to attach a value to a stock, but -- to quote screenwriter William Goldman's mantra about Hollywood -- "nobody knows anything."

It is a testimony to the elusive nature of stock valuations that so many people have come up with so many different ways to value a stock, the two most prominent categories being technical analysis and fundamental analysis, which we'll talk about in a bit. For the sake of offering a starting point, the value of a stock is what participants are willing to pay for it based on current conditions, the company's growth prospects and investor perceptions. Most importantly: a stock's value is in constant flux.

Technical analysis involves using stock charts to track historical patterns of investing in an attempt to glean how a stock will perform going forward. The practitioners of technical analysis, called chartists, aren't overly concerned with a company's fundamentals in determining value. It's more about group psychology: They want to detect patterns of how market participants have behaved and apply it to stocks in the present. ...