How finance folk use it
Usually seen in stock trading, value investing is a strategy in which you look for and buy stocks that are going for less than they’re actually worth according to their intrinsic or book value.
This is done in the belief that the prices of these undervalued shares will eventually reflect their true worth, earning a profit for investors who purchased when the prices were lower.
Is it good or bad?
Value investors use a lot of metrics to see if a company’s stocks are fit for this strategy. These include the price-to-book ratio, price-to-earnings, and free cash flow.
The company’s performance as seen in the figures for debt, equity, sales, and revenue growth are usually looked at as well, as these also help give a picture of its true value.
Value investors are often seen going against market trends, so they may be holding instead of selling, or waiting instead of buying. They do not believe in the efficient-market hypothesis, which states that stock price always reflects the company’s value.
What it means for you
Value investing is based on the belief that the movement of stock prices does not always accurately reflect a company’s long-term fundamentals. It is nearly always a long-term strategy, because a lot of time is needed for share prices to reach what is seen as the real value.
To do value investing, you’ll need to do a lot of research and analysis to find stocks that you consider undervalued. There is no step-by-step process for this, and different investors may have their own particular way of doing it.
