Bond valuation is straightforward: a bond's value is the present value of all future coupon payments plus the present value of the face value at maturity. A 10-year bond with a 6% coupon and $1,000 face value, discounted at 8%, is worth about $866. Higher market rates = lower bond value. Lower rates = higher value.
Stock valuation is more complex because cash flows are uncertain. The Dividend Discount Model (DDM): Stock Value = Next Year's Dividend ÷ (Required Return − Growth Rate). If a company pays $3 in dividends growing at 5% and your required return is 12%, the stock is worth $3 ÷ 0.07 = $42.86. The DCF model extends this to all free cash flows, not just dividends.
In practice, analysts use multiple methods: DCF, relative valuation (P/E, P/B, EV/EBITDA compared to peers), and asset-based valuation. Each gives a different answer — the range provides a valuation zone. If all methods say the stock is cheap (trading below intrinsic value), it is a strong buy signal. This multi-method approach reduces the risk of any single model's assumptions being wrong.