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4. An objective valuation of a company

The listed shares of a company have an objective market value.

The stock market systematically incorporates growth and profit expectations when evaluating listed companies, as well as external variables. This particular feature distinguishes the prices of stock market operations from those paid using other methods.

The price that shares reach of a listed company is not only representative of the agreement between supply and demand in the market; it also becomes the reference point for other investors, whether they are shareholders or not.

The stock market systematically incorporates profit expectations when evaluating listed companies

The continuous evaluation of expectations explains the rapid and positive performance of the share price of some companies. In companies with a big capacity to generate business " growth companies" the issue price can often be much higher than the book value and rise sharply if these expectations are fulfilled and surpassed.

The market value is a key reference for the company's executives when taking decisions. Indeed, the rise in the share price is increasingly becoming the main objective of management.

This framework offers several other advantages. Firstly, it is a high liquidity payment instrument which can be offered in a financial transaction, as collateral for loans, etc. On the other hand, companies can opt to reinvest profits instead of paying dividends, without affecting those shareholders who need immediate liquidity.

Listed companies have the advantage over other firms of a liquidity premium in their share price

An investor always prefers shares that can be sold when needed. On the US market this premium has usually been set at around 20%.

 

 

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