Value Investing

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DEFINITION of 'Value Investing'

The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.

Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.

BREAKING DOWN 'Value Investing'

The big problem for value investing is estimating intrinsic value. Remember, there is no "correct" intrinsic value. Two investors can be given the exact same information and place a different value on a company. For this reason, another central concept to value investing is that of "margin of safety". This just means that you buy at a big enough discount to allow some room for error in your estimation of value.

Also keep in mind that the very definition of value investing is subjective. Some value investors only look at present assets/earnings and don't place any value on future growth. Other value investors base strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, it all comes back to trying to buy something for less than it is worth.

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    The drugs sector is a good choice for value investing because it always has demand and a competitive moat. This simplifies ... Read Full Answer >>
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    Short puts would be a profitable trade in low-volatility bull markets or range-bound markets. Selling puts is a strategy ... Read Full Answer >>
  5. Why should value investors consider the insurance sector?

    Insurance companies receive steady cash flows for years with irregular payouts. Following these payouts, insurance companies ... Read Full Answer >>
  6. Why would a value investor include an allocation to the airline sector?

    It's reasonable for a value investor to include some asset allocation to the airline industry for two main reasons. First, ... Read Full Answer >>
  7. What makes the chemicals sector attractive to value investors?

    The chemicals sector is attractive to value investors because it is a capital-intensive sector that can become grossly undervalued ... Read Full Answer >>
  8. What can cause an asset to trade below its market value?

    An asset may trade below its market value due to a lack of demand for the asset in the marketplace, a perception or belief ... Read Full Answer >>
  9. What is the average annual dividend yield of companies in the insurance sector?

    Value investors commonly purchase electronics stocks because they can become quite cheap during recessions with a wide differential ... Read Full Answer >>
  10. Is the banking sector a good choice for value investing?

    The banking sector is a good choice for value investing. Value investors look for stocks in which the market price does not ... Read Full Answer >>
  11. Why would a value investor consider the Internet sector?

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  12. What can cause an asset to trade above its market value?

    High demand and inaccurate valuation are the two most common factors that may lead to a situation where assets trade above ... Read Full Answer >>
  13. What is the average price-to-earnings ratio in the drugs sector?

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