What is value investing
Now this is a new technique for the beginners who are just entering the stock exchange. There is an ever going learning in the stock exchange even if you have spent all your life in the stock market, You are always a learner in stock market as every now and then you come across with few dilemmas which you haven’t came across all your life. To tackle the problem of lower gains from the stocks, many processionals came up with this technique of value investing, where you invest in a company in its early stage and then wait for your returns.
“Price is what you pay. Value is what you get.” said Warren Buffet. Just like these great words, this great man has been a firm believer of this technique and made everybody believe that this way of investing is possible. Value investing is a technique where an investor, invests in a busy in its early phase and then wait for the return. The main idea behind this is the investment in stocks which are undervalued or are valued less than their actual intrinsic value, which leaves scope for profit. Many stocks are under-valued and they need to be tapped and cashed in to make huge gains.
The break down
In value investing, the goal is to tap in the undervalued stock that comes in an irrational manner to the investor and the investor seeks to gain profit from this irrational investments. This is a very subjective and selective process as two different investors can come to two different views regarding the same stock. There are two ways by which an investor can tap in these irrational stocks, either by selecting stocks with lower than average price to book ratio and lower than average price to earnings ratio with higher dividend returns. The difference between both will be the profit to the investor. Another concept to clear further doubts will be to consider the margin of safety to come to the intrinsic value of the stock. In total the inherent or the intrinsic value is required of the shares to estimate which is a valued investment.
How stocks become undervalued?
Also known as the unglamorous stocks, the stocks that are undervalued or who are valued much lower than what they should have valued are known as Undervalued stocks. In the Modern Era of Amazon and Flipkart, we can call these stocks as best deals where we get more than what we have paid for. Generally, the stocks are under-valued due to the following reasons:
- The concerned industry is very poorly managed and that left no space for one specific business to shine in. Businesses in this industry are just fitting in poorly and leave no space to stand out.
- The company may be emerging from bankruptcy and the market is failing to recognize the potential of that company.
- There may be some short term crises for a shorter time span which downgraded the value of shares but the potential of the company is still intact.
- Sometimes, the demographic location plays an important role; a high potential company sitting at the remote locations might not get trust from the masses and stays in the dark.