A value stock is a stock that has low market value relative to its book value or net worth. These stocks are often the “cheapest” stocks in the market, because they trade at a low price in relation to their revenue, earnings, or book value. A value stock is often found in large, mature companies that have a slowing growth rate and pay dividends.
A value stock has often (wrongly) fallen out of favor in the market place and is considered bargain-priced compared to others when looking at intrinsic value. These stocks are typically priced much lower than stocks of similar companies in the same sector, and their price is often reflective of company problems, disappointing earnings, negative events, or other temporary conditions.
A value stock is often found in a company with good earnings that is currently selling at a low price relative to their intrinsic value. A value stock is perceived to be less risky than a growth stock. These stocks are the long term investments that value investors like Warren Buffet believe in.
Value investors look exclusively for “bargains”, or stocks that are trading at a discount to their proper valuation. Value Funds invest in these types of stocks that are thought to be good bargains. A value investor believes that the stock market isn’t always efficient and a good value stock can be found under any market conditions.
In finding a value stock, most value investors will conduct fundamental analysis to arrive at the stock’s intrinsic value and determine whether the stock is currently trading at a good price with respect to that value – the margin of safety.
Some value investors believe that an easy way to find a value stock is to invest in the “Dogs of the Dow”, companies from the Dow Jones Industrial Average that whose dividend is the highest fraction of their stock price.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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Allen Taylor