Stock Market Essay

Another reason behind overvaluation of stock market has been suggested by Autore, Boulton and Alves (2015); according to whom the stocks are overvalued to a great extent due to the higher levels of failure to deliver.Three major exchanges report a huge number of failures to deliver in their daily listings approximately equal to 10,000 shares or 0.5% of the overall outstanding shares, which further explains the reason behind extreme overvaluation of stock markets (Autore, Boulton and Alves, 2015).

While different authors argue that every evaluation metric has its merits and demerits, which makes it difficult to conclude whether stock markets are overvalued when calculated via a specific metric, a Phoenix (2014) report provides evidence of the fact that stock markets are overvalued by almost every metric used for valuation. stock market which is analysed to be overvalued by 55% (Lombardi, 2014), while it is estimated to be overvalued by 80% according to another research (Heyes, 2015).

According to Autore, Boulton and Alves (2015), short interest rates are also a determinant of stock valuation; the lower the short interest rate of the initial stock, the more overvalued the stock will be. Lombardi (2014) identifies it to be overvalued to such an extent due to the increasing presence of bullish stock advisors as compared to bearish advisors, which results in the investors being complacent without being anxious about a huge market sell-off.

Another school of thought has a viewpoint that they are fairly valued (Wolf, 2008); while, some hold the opinion that they are undervalued (Pan, 2009).

Due to these differences in viewpoints, it becomes difficult to gauge the extent to which stock markets are overvalued.

Hussman (2014), who is well-known for his accurate insights about the financial markets, comments in one of his speeches that due to their Zero Interest Rate and Quantitative Easing policies, the central banks have driven the stock prices up to twice as high as they are supposed to be.

This imparts the stock markets to be overvalued by 100%.By evaluating the market through various methods, Tenebrarum (2015) established an opinion that the U. stock market is valued at its highest peak to date.Additionally, Lombardi (2014) recognises these indicators to be similar to those before the stock market crash in 2007.The KCE method, however, is specifically subjective if the analyst is interested in estimating the potential future earnings of an organization (Ujwary-Gil, 2014).The Dividend Discount Model is based on the assumption that the price of a stock at equilibrium will be equal to the sum of all its upcoming dividend yields discounted back to its current value (Ivanovski, Ivanovska and Narasanov, 2015).The price to earnings ratio is the most common method used to evaluate stock markets, whereby the company’s current stock price is compared with the predicted earnings it will yield in future (Stowe et al., 2008).Knowledge Capital Earnings – KCE is another method through which a company’s intellectual capital can be gauged and interpretation of the extent to which it is overvalued can be given (Ujwary-Gil, 2014).With an overall market yield of 4%, Paler (2012) recognised the stock markets to be fairly valued, regarding them as a suitable investment platform.For example, Newstex (2015) reported Amazon’s stock price to be fairly valued at 5 per share as opposed to 0.The ideal situation is the one when stock markets are appropriately valued, which Wolf (2008) identifies as an opportunity.He says that fairly priced stock markets are favoured by the investors and risk-seeking governments, as it is the situation with lesser uncertainty.

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