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Standardized value is a statistical measure of how much a distribution varies or deviates from the average or mean. Another term for standardized value is normal deviate. The standardized value is derived from measuring the distance from the average and dividing by the standard deviation of the entire distribution.
Standard deviation is how far a variable, such as the price of a stock, moves above or below the average value. Financial analysts may calculate the standard deviation of a stock or portfolio over time to measure how risky an investment would be. Generally, the higher the standard deviation, the higher the risk involved in investing.
In addition, the standardized value and standard deviation are compared to the stated or implied volatility to determine whether the stock or security is accurately valued. Measuring and comparing the standard value over time, or the historical value, is used to predict how a specific stock, portfolio, or security will perform in the future. The range of the investment’s potential value is based on a history of past performance and a probability for meeting a certain level is estimated.
A stock or security that has a volatile standardized value may have higher potential earnings, it but will also have a higher potential for loss. The standard deviation shows how far the value is from the average, either above or below. Values above the average value of a security will bring in more profit while values below the average will show a loss, depending on the price at which the security was purchased.
The amount an investor is willing to pay for a share of a particular stock depends on both the current profit and the expectation of potential earnings or growth. Investors, company chief executive officers (CEOs), and stock analysts value stock with a variety of methods. One such method is relative valuation where a company’s stock price or value, as well as earnings, are compared with stocks of other similar companies.
Stock valuations are often expressed as the ratio of the share price to one of the indicators of financial performance. This could include price/earnings, price/sales, price/book value, price/cash flow, or price/estimated growth. Standardized value is important in comparability of either a company’s potential growth to its own historical earnings, or in comparing the stock value of one company against that of a similar company.
Generally, stock valuation is difficult because there is no surety that a stock will behave in the projected manner. The value of a share of stock depends on past performance and future expectations. Sometimes what a targeted audience, such as investors or analysts, think might happen becomes fulfilled prophesy because others will act on the expectations.
Looking at this metric alone is a terrible indicator about how a stock will perform because it doesn't take into account extraordinary events which companies face on an alarmingly regular basis.
What, for example, happens if a trucking company if its drivers are unionized and the Teamsters call for either a strike or a radically different labor company that raises salaries and benefit costs substantially? What happens if a company's flagship product turns out to be defective and massive recalls must be made to make that product function as intended?
Such events are common when it comes to corporations and you can't predict those with all the standard deviation analysis in the world. Of course, that's what makes playing the stock market risky in the first place -- critical events do pop up from time to time and the company that doesn't respond may go out of business. Such things are downright possible to predict.
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