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The next higher risk investment is buying common stock. For example if a CD gives you a 3% return, treasury bonds give you a 4% return, then you would want your stock gives you a higher return of perhaps 6%.

What does it means for a stock to give investor a return of 6%? All we need to do is find the share price of a common stock and the profit per share (also known as earning per share) of that particular stock. Therefore, the fair value of Magna common stock is when it can give me a return of 6%

So, what is the fair value of Magna common stock in this case? For a profit of $ 6.95 per share, the fair value of Magna common stock is $115.80 per share.

A lot of discussions have been devoted towards finding fair value of an investment. The goal of every investors is to find undervalued investment and sell it when it reaches fair value. Admittedly, this is the hardest part of investing. So, what is fair value? Fair value is a point where the price of an investment reflect its earning power.

Fair value is relative and it depends on other factors likewise the investors' control. In here, we will discuss on indirect fair value within our own circumscription of control. In short, untruthful fair value of an investment depends on the rate of return expected and the risk taken to bring through that return. Higher risk needs higher reward. It is quite simple.

So, what resource constitute lower risk investments? We can only compare. First thing that comes out of my mind is voucher of Deposit (CD). You are guaranteed certified return (interest rate), if you can hold for a absolute pre-determined time frame. You would never lose your principal at the end of the time frame.

The next low risk investment is Treasury Bond. This is the bond issued by the United States government, which is deemed to be safest in the world. There are in anticipation risks bracketed with the small fluctuation in the bond price. However, if you held the bond until maturity, you are guaranteed decided rate of return. Your rate of return depends to authenticated extent on the price that you the bond at.

The next higher risk investment is purchase adequate stock. This is what we are going to focus more here. It is considered higher risk than the two types of investments mentioned previously being you have a higher whimsicality of losing money on your investments. Earlier, we established that higher risk needs higher reward. Therefore, stock investing requires a higher reward.

So, what does this have aught to do with fair value? Quite simply, the price of a well-known stock that we buy must gives us a higher serial return than gag or CD. For example if a CD gives you a 3% return, treasury hamper give you a 4% return, then you would want your stock gives you a higher return of perhaps 6%.

What does it means for a stock to give investor a return of 6%? It never really say it, doesn't it? You are partly right. While it is not explicitly shown, you can do a little digging and find out how much the return of your stock investment would be. For example, if your acceptance bill of Deposit (CD) gives you a 2% vascular plant return, for $ 100 of investment, you would earn $ 2 every year. Let's pull that you want your stock to give you a return of 6%, which is higher than CD or treasury bond. This implies for every $ 100 invested in chaste stock, it needs to give us a return of $ 6 annually.

Where can we get this information? You can get it on Yahoo! Finance or other financial publications. All we need to do is find the share price of a stale stock and the profit per share (also known as earning per share) of that particular stock. Let's use an example to illustrate my point. Magna International Inc. (MGA) is expected to post a profit of $ 6.95 per share for fiscal year 2005. Recently, the share is trading at $ 73.00. The docket return of purchase Magna stock is therefore $6.95 divided by its share price $ 73.00. This gives us a return of 9.5%.

Will Magna continue to give investors a 9.5 % return year by year? It depends. If the stock price rises, Magna will return less than 9.5 % annually. What else? Well, Magna might not constantly produce the same sum of profit year year. It might even produce a loss! So, you see, stock investing is inherently risky considering there are two moving part in the equation. Price of the sufficient stock and the profits produced by the bunkmate itself. That is the reason why investor need to aim for higher return when choice their stock investment.

All right. So, let's move on to the crucial thing in investing in shared stock. What is the fair value of Magna stock insolent a constant profit of $ 6.95 per share? Personally, I carry over fair value of a collaborative stock to be at least 2% first of all the rate of Treasury bond. Please note that I am using the 10 year bond here. Recently, treasury bond can give us a 4 % return. Therefore, the fair value of Magna homely stock is when it can give me a return of 6%

So, what is the fair value of Magna customary stock in this case? For a profit of $ 6.95 per share, the fair value of Magna interest stock is $115.80 per share. That's right. At $ 115.80 per share, Magna third estate stock will return investors 6% annually. Having said that, we should never buy a despicable stock at fair value. Why? inasmuch as our investing purpose is to make money. If we buy stocks at fair value, then when do we profit from it? Do we expect to sell it when it is overvalued? Sure, it would be nice if we can do that all the time. But to be conservative, let's not bank on our stocks reaching overvalued level.

There you go. I have explained how to size up fair value in a neat stock. Of course, the $ 6.95 per share profit figure is the expectation of profit compiled by Yahoo! Finance. It is not in any way an endorsement to buy Magna normative stock. You should do your own mensuration to verify that number.

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