There are several ways to value stocks.

a. Some analysts examine patterns of past performance; others follow investor psychology.

b. The fundamental value of a stock depends on expectations for a firm’s future profitability.

c. To compensate for the fact that stocks are risky investments, investors in stock require a risk premium.

d. The dividend-discount model is a simple way to assess fundamental value.

According to this model, stock prices depend on the current level of dividends, the growth rate of dividends, the risk-free interest rate, and the equity risk premium.

e. According to the theory of efficient markets, stock prices reflect all available information.

f. If markets are efficient, then stock price movements are unpredictable, and investors cannot systematically outperform a comprehensive stock market index like the S&P 500.