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 are quoted at a higher price than the one that actually and fairly would correspond to it. This phenomenon usually arises and even encourages the demand for a title.
Naturally, overvaluation is one more characteristic of financial markets and a common feature of stock markets. It is possible that a company is objectively worth less than what the listing and capitalization says at any given time. Thus, it is the markets that indicate and anticipate the value of a company, so investors can see in these securities a possibility of growth or performance.
A circumstance that occurs when the overvaluation is very high is the appearance of bubbles . In these cases, investors are in an escalation of purchases and price increases that do not comply with the law of supply and demand . That is, despite the fact that the price rises and that it is known that the real valuation is much lower, agents continue to buy.
In the case of bubbles, the dynamics tend to fever by other investors. This, against the possibility of earning 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 previously, in the quoted titles of the shares, although it can also be seen in other fields such as the usual merchanting of goods, and even more so, in the currency markets . A currency is said to be overvalued when en has a higher value than it should real and objectively have at an exchange rate . This is seen when the purchasing power of a currency is less than the exchange rate.
For example, currencies such as the Argentine peso or the Venezuelan bolívar are overvalued because this has been legally and politically imposed. This, to avoid collapse and inflation in the economy, in addition to being able to buy abroad more advantageously. However, in reality this is not so, since a parallel market arises that denotes that these currencies are worth much less than they imply