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Valuation

Valuation refers to the price of a stock relative to the earnings generated by the underlying company. Valuation is critical when investing because it highlights whether you are buying the stock for a ‘cheap’ or ‘expensive’ premium. A stock with a high valuation would have an ‘expensive’ premium on its price relative to its earnings because investors expect the company to grow at a high rate. A stock with a low valuation would have a ‘cheap’ premium on its price relative to its earnings because the investors do not expect high growth from the company.

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