Valuation is the first step toward intelligent investing. When an investor attempts to determine the worth of her shares based on the fundamentals, she can make informed decisions about what stocks to buy or sell. Without fundamental value, one is set adrift in a sea of random short-term price movements and gut feelings.

For years, the financial establishment has promoted the specious notion that valuation should be reserved for experts. Supposedly, only sell-side brokerage analysts have the requisite experience and intestinal fortitude to go out into the churning, swirling market and predict future prices. Valuation, however, is no abstruse science that can only be practiced by MBAs and CFAs. Requiring only basic math skills and diligence, any Fool can determine values with the best of them.

Before you can value a share of stock, you have to have some notion of what a share of stock is. A share of stock is not some magical creation that ebbs and flows like the tide; rather, it is the concrete representation of ownership in a publicly traded company. If XYZ Corp. has one million shares of stock outstanding and you hold a single, solitary share, that means you own a millionth of the company.

Why would someone want to pay you for your millionth? There are quite a few reasons, actually. There is always going to be someone else who wants that millionth of the ownership because they want a millionth of the votes at a shareholder meeting. Although small by itself, if you amass that millionth and about five hundred thousand of its friends, you suddenly have a controlling interest in the company and can make it do all sorts of things, like pay fat dividends or merge with your company.

Companies buy shares in other companies for all sorts of reason. Whether it be an outright takeover, in which a company buys all the shares, or a joint venture, in which the company typically buys enough of another company to earn a seat on the board of directors, the stock is always on sale. The price of a stock translates into the price of the company, on sale for seven and a half hours a day, five days a week. It is this information that allows other companies, public or private, to make intelligent business decisions with clear and concise information about what another company's shares might cost them.

The share of stock is a stand-in for a share in the company's revenues, earnings, cash flow, shareholder's equity -- you name it, the whole enchilada. For the individual investor, however, this normally means just worrying about what portion of all of those numbers you can get in dividends. The share of ownership entitles you to a share of all dividends in perpetuity. Even if the company's stock does not currently have a dividend yield, there always remains the possibility that at some point in the future there could be some sort of dividend.

Finally, a company can simply repurchase its own shares using its excess cash, rather than paying out dividends to shareholders. This effectively drives up the stock price by providing a buyer as well as improving earnings per share (EPS) comparisons by decreasing the number of shares outstanding. Mature, cash-flow positive companies tend to be much more liberal in this day and age with share repurchases as opposed to dividends, simply because dividends to shareholders get taxed twice.

This series of articles will take you through the major methods for valuing companies. The main categories of valuation I will elucidate are valuations based on earnings, revenues, cash flow, equity, dividends and subscribers. Finally, I will sum this all up in a conclusion that positions these valuations in the broader context of fundamental analysis and gives you a sense of how to apply these in your own investment efforts.

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