Login | September 15, 2026
Valuing Stocks
Motley Fool
Published: September 15, 2026
Q. How is a stock's real value determined? -- G.C., Flagstaff, Arizona
A. That's a great question, because a stock's current price is not necessarily equal to its intrinsic, or fair, value. Overenthusiastic investors may have bid the price up into overvalued territory. Or it may be undervalued, with most investors not interested or confident in the stock. It's smart to seek out and invest in undervalued high-quality companies.
There's no way to determine a stock's exact fair value, because you'll always have to estimate some numbers, such as future growth rates. Even experienced stock analysts will often value a stock differently. They may employ a fancy "discounted cash flow" analysis, estimating future cash flows and calculating present values assuming varying discount rates. (This looks impressive, but it's still an educated guess.)
Many individual investors use simpler ways to estimate a stock's valuation, such as the price-to-earnings (P/E) ratio, which divides the current stock price by the last 12 months of earnings per share. The lower the P/E ratio, the more attractive the price (though it's important to remember that P/E ratios vary by industry).
Don't rely on any one valuation metric alone, though, and consider reading up on more ways to value stocks.
Q. Do I need to work for a company to buy its stock? -- C.M., Coeur d'Alene, Idaho
A. Not at all. Any of us are free to buy any stock that's publicly traded. You'll probably need a brokerage account, though. (Learn more about brokerages at Broker.Fool.com.) If you work for a publicly traded company, you might receive shares of its stock or employee stock options, or you might be able to buy its shares at a discount.
Fool's School
Think Twice Before Getting into the Rental Property Business
Buying properties and renting them out may seem like a ticket to great wealth. It certainly has helped plenty of people get rich, but it's generally not as easy as it may seem.
The upside is clear: You can collect regular rent payments from tenants and can deduct many expenses related to your real estate business, such as repairs. The income you receive can offset the mortgage and other costs. Over time, the value of your property should (but may not!) increase, and, if you're a handy sort, you might save money on repairs and upkeep by doing much of the work yourself.
But you won't just start out collecting checks. You'll first need to find and buy the right kind of property. Then you'll need to find good tenants, and it's not always easy to tell the good from the bad. Bad tenants can deliver massive headaches, perhaps being delinquent in payments or damaging your property. You might hire a property management company to find tenants and manage them and the property, but that can cost you around 8% to 12% of the rent collected.
If you need or want to evict a tenant, it can be trickier than you expect, as tenants generally have legal protections. Even when things are going well, you'll occasionally have a month or two between tenants when the property is uninhabited and not generating rental income.
And, of course, you'll be on the hook for not only any mortgage payments, but also expenses for property taxes, insurance, maintenance and repairs. (For example, you may need to repaint between tenants and occasionally replace carpeting.) You may even be paying for utilities, unless you have your tenants doing that.
Read up on local investment property laws -- and perhaps also read a book such as "Real Estate Investing for Dummies," by Eric Tyson and Robert S. Griswold (For Dummies, $25). Remember that you can always invest in stocks or funds focusing on real estate instead.
My Smartest Investment
Long-term Investing
My smartest investment happened in the '70s, when I was in college. My uncle persuaded me to invest some money in a mutual fund. As a student, I didn't have a lot of investable money, but I put $2,300 into a certain fund he recommended. I've never added any money to that original investment and have never sold any of it, either. After 50-plus years, it's worth more than $300,000! And that's despite it performing relatively poorly over the past decade or two. -- B.A.B., Saratoga, New York
The Fool responds: This is a great reminder of how powerful it can be to invest early and give your money a lot of time to grow -- ideally, multiple decades. Doing so means you'll be able to ride out occasional downturns in the market. (Do check in on your investments now and then, though, to make sure they're still promising.)
Note, too, that an investment that goes from $2,300 to around $300,000 over 50 years has an average annual growth rate of around 10.2%. That's close to the long-term average annual growth rate of the overall stock market, so you might have gotten a similar result with a simple low-fee, broad-market index fund. (Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@fool.com.)
Foolish Trivia
Name That Company
I trace my roots back to 2011, when some Stanford business school students set up an alumni-funded lending platform to connect recent graduates with nearby alumni. I launched student-loan refinancing in 2012 and mortgages in 2014. In 2022 I was approved to be a national bank. Today, based in San Francisco and with a recent market value near $24 billion, I'm a "one-stop shop for digital financial services," with more than 15 million members and more than $73 billion in funded loans. I offer banking, lending, investing and even cryptocurrency services. Who am I?
Last week's Trivia Answer
I trace my roots back to 1972, when a Michigan couple moved to Los Angeles and launched a bakery with all their savings. In 1978, their son opened a restaurant in Beverly Hills to promote his mom's desserts. Today, with a recent market value of $5 billion, I own and operate 374 eateries in the U.S. and Canada, both under my flagship name and under brands like North Italia and Flower Child. My flagship's menu features more than 250 items. I've been named one of Fortune magazine's "100 Best Companies to Work For" for 13 consecutive years. Who am I? (Answer: The Cheesecake Factory)
The Motley Fool Take
Considering Microsoft
Microsoft shareholders have had a disappointing year, with shares only up about 4% as of early August. But Microsoft shares are rather attractively priced for would-be investors. The stock's forward-looking price-to-earnings (P/E) ratio was around 25 in early August, below the five-year average of roughly 29.
The company has a lot going for it: It encompasses not only the ubiquitous Windows operating system, but also the dominant Office 365 suite of applications, the second-largest cloud computing platform Azure, the Xbox gaming platform and even LinkedIn, among many other offerings.
Like other huge tech companies, Microsoft has been investing heavily in artificial intelligence (AI) and incorporating it into many of its products and services. Some investors are concerned that it has been spending billions of dollars on AI infrastructure, but it will take a while to see how those investments pay off.
In the meantime, its Azure platform is growing robustly, and the company's contracted backlog (a source of future revenue) recently doubled year over year to $627 billion. Microsoft is also a dividend-paying stock. Though it recently yielded only a bit over 0.7%, the payout has been growing at an average annual rate of 10% over the past five years. Long-term, risk-tolerant investors are likely to do well investing in Microsoft. (The Motley Fool owns shares of and recommends Microsoft.)
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