Overvaluation - Term Overview

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Overvaluation is the circumstance in which an asset trades above its intrinsic value, that is, the real and objective value.

Overvaluation occurs, in other words, when the shares of a company on the stock market trade at a higher price than the real one and would precisely correspond to it. This phenomenon arises regularly and even encourages the demand for a degree.

Naturally, overvaluation is another feature of financial markets and a common feature of stock markets. It's possible that a company objectively is worth less than what the price and capitalization says at any given time. Thus, it's the markets that indicate and anticipate the value of a company, so investors can see in these securities a possibility of growth or performance.

One circumstance that occurs when the overvaluation is very high is the appearance of bubbles. In these cases, investors find themselves in an escalation of purchases and price increases that don't comply with the law of supply and demand. That is, despite the fact that the price rises and it's known that the real valuation is something much lower, agents continue to buy.

In the case of bubbles, the dynamics attend to the fever on the part of other investors. This, in the face of the possibility of making money very quickly and the impossibility of getting out of the bubble.

Overvaluation in the stock market and in currencies

The overvaluation occurs, as we said before, in the quoted securities of the shares, although it can also be seen in other fields such as the habitual purchases and sales of goods, and even more so, in the currency markets. It's said that a currency is overvalued when it has a value greater than what it really and objectively should have at an exchange rate. This is seen when the purchasing power of a currency is lower than the exchange rate.

For example, currencies such as the Argentine peso or the Venezuelan bolivar are overvalued because legally and politically it has been imposed that they were. This, to avoid a collapse and inflation in the economy, in addition to being able to buy abroad more advantageously. However, in reality this isn't the case, since a parallel market arises that denotes that these coins are worth much less than they imply.

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