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Usually, investors buy shares at prices which are below their true value (real value). This is due to the fact that the possibility of a decrease is much less plus the chances of a gain would be more. Gains usually become possible if the price of a share goes up and reaches its real value as this value per se rises as well. At the same time, a share that has been bought at a price that is below, what is known as 'its real value' would indicate a higher yearly return than, the value it had been purchased at.
The best value for money when it comes to shares is those that are available at a large proportionate discount, which is equivalent to the real value. The well known and most useful way in which you can estimate the real value is a process that involves two steps. Apply a PE ration to a suitable EPS figure. A PE ratio of a particular company can ideally be gauged by simply understanding the ratios that are applied to all its' competitors and to the various shares of similar companies. Usually, a PE ratio can be defined as market value per share divided by its EPS.
Provided that other components remain equal, a purchaser will have more value in a transaction if the PE ratio is low. In order to end up with a share market price that is theoretical, its PE ratio is multiplied with the prospective EPS number for the present year. There is another approach which is considered less useful. In order to find the real value, the prospective dividends per share are divided by a suitable dividend yield. Also the fact that regular shareholders possess a stake in the earnings makes this method less useful.
Moreover, the payout depends on the decision of the board of directors.
However, what most investors focus on is dividend yield; this shows that it can't be wholly ignored. Provided that everything else remains equal, if the yield is higher, the purchaser gets a better value. By scouring the yields of a company's competitors and other similar companies, a company's dividend yield can be obtained. It is also important that dividends and their franking status are regarded. The degree of dividends being paid by companies that pay franked dividends cannot be compared with that of companies that do not.
In order to ascertain a theoretical market value when it comes to a share of a company, this yield should then be divided into prospective dividends for each share figure used for the present year or for that matter, some other year in the near future while taking into account some respite for any delay. Additionally, it should be noted that prospective dividend for each share figure with regard to the present year should ideally focus on last year's rate. This may depend based on any additional information that may be presented from the company. If new issues are being made, companies will be expected to point out to the latest dividend rate to be expected in future.
