investing

valuation

The process of determining the current worth of an asset or company.

Example

“The startup received a valuation of $50 million after its Series A funding round.”

Memory Tip

VALU-ation — you determine the VALUE of something. The -ation means it's a process.

Why It Matters

Valuation helps you make informed investment decisions by understanding whether an asset is overpriced or underpriced. Without knowing how to value investments, you risk overpaying for stocks or real estate, which directly impacts your wealth-building potential and long-term financial returns.

Common Misconception

Many people assume that a company is worth whatever its stock price is on any given day. In reality, stock price reflects market sentiment and can be disconnected from true value, meaning a high-priced stock might actually be overvalued or a low-priced stock might be undervalued.

In Practice

If you are considering buying shares in a company that earned 100 million dollars in profit with 50 million shares outstanding, that is 2 dollars in earnings per share. Using a price-to-earnings ratio of 15, a fair valuation would be around 30 dollars per share, so if the stock trades at 20 dollars, it may be undervalued and worth buying.

Etymology

From Latin 'valere' meaning 'to be worth' + -ation — the process of determining worth.

Common Misspellings

valuatonvaluaionvaluationvalaution

More in investing

Other investing terms you should know

appreciationAn increase in the value of an asset over time.…bondA fixed-income investment where an investor loans money to a…diversificationA risk management strategy that mixes a wide variety of inve…dividendA payment made by a corporation to its shareholders, usually…expense ratioThe annual fee that mutual funds or ETFs charge investors, e…fixed incomeInvestments that provide a regular, predetermined return, su…