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Intrinsic value refers to the perceived or calculated true value of an asset, investment, or company, based on fundamental analysis without reference to its market value. It is a critical concept for investors aiming to determine whether an asset is undervalued or overvalued by the market.
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Market inefficiency occurs when asset prices do not accurately reflect all available information, leading to opportunities for investors to earn abnormal returns. This phenomenon challenges the Efficient Market Hypothesis, suggesting that markets can be influenced by irrational behavior, information asymmetry, and transaction costs.
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Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. This approach relies on thorough fundamental analysis and the belief that the market will eventually recognize the true value of undervalued stocks, leading to potential profit for investors.
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Discounted Cash Flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted for the time value of money. By calculating the present value of expected returns, DCF helps investors assess whether an investment is likely to be profitable or not.
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The Price-to-Earnings (P/E) ratio is a valuation metric used to assess whether a stock is over or undervalued by comparing its current share price to its per-share earnings. It provides insight into market expectations of a company's future financial performance and is crucial for investors making informed decisions about stock investments.
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Fundamental analysis is a method of evaluating a security's intrinsic value by examining related economic, financial, and other qualitative and quantitative factors. It involves analyzing a company's financial statements, management, competitive advantages, industry conditions, and overall economic factors to make informed investment decisions.
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Market sentiment refers to the overall attitude of investors toward a particular security or financial market, which can influence price movements and create trends. It is often driven by emotional factors and can be measured through various indicators, providing valuable insights for traders and analysts in decision-making processes.
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The Efficient Market Hypothesis (EMH) posits that financial markets are 'informationally efficient,' meaning that asset prices fully reflect all available information at any given time, making it impossible to consistently achieve higher-than-average returns through market timing or stock picking. EMH is categorized into three forms: weak, semi-strong, and strong, each differing in the level of information reflected in market prices.
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The Price-to-Book (P/B) Ratio is a financial metric that compares a company's market price to its book value, providing insight into how much investors are willing to pay for each dollar of net assets. A lower P/B ratio may indicate undervaluation or potential financial distress, while a higher ratio could suggest overvaluation or strong future growth expectations.
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