An overvalued stock is a stock that is trading above its real/intrinsic value.
You will find plenty of overvalued stocks in almost all stock exchanges in the world. These stocks are trading well above their fair value(current intrinsic value of the company based on the estimate of future profits).
Let’s understand this with an example of TPLP(which is a company listed on the Pakistan Stock Exchange PSX). Let’s say in March 2021 you invested 1 lac rupees in TPL Properties Limited (TPLP) at a share price of 10 rupees and you get about 10,000 shares.
After about 5 months in September 2021, the share price touches all-time high of 67 rupees. That’s a gain of 148% in 5 months. Now your initial investment of 1 lac is worth about 2,48,000. You doubled your investment in nearly 5 months.
But after touching an all-time high the TPLP stock has seen a fall and since then it has seen a huge drop in its value, currently, it stands at Rs 31. This shows the stock was overvalued by investors.
So with this example here are the conclusions.
- Stocks are a good source of high returns.
- With proper research and with risk management you can pull out great returns
- Exiting the market is as important as selecting good shares.
- Investing in overvalued stocks can be risky
- Dont fall for “ if you had invested this then u have this” without properly researching.
- Always diversify your investment ”Never put all of your eggs in one basket”
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