Definition of Overvalued
What is the definition of the term "overvalued" as it applies to the stock market? What does the term overvalued mean?
When somebody claims that a stock is "overvalued", they are saying that the stock is currently trading for more than it is worth.
Now, calling a company "overvalued" is obviously completely subjective - some may believe that a company is overvalued, while others might believe that it is undervalued.
The most common way to value a company is through its Price/Earnings ratio. The problem with the Price/Earnings ratio, of course, is that it doesn't properly value fast-growing companies that may be closing to turning the corner and reaching profitability.
Is a stock overvalued, undervalued or valued perfectly? These are the questions that haunt investors and traders on a daily basis.
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