Value Investing

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Magic Formula Investing

    A money-making strategy that teaches investors a common-sense ...
  2. Investment Philosophy

    A set of guiding principles that inform and shape an individual's ...
  3. Growth At A Reasonable Price - ...

    An equity investment strategy that seeks to combine tenets of ...
  4. Value Stock

    A stock that tends to trade at a lower price relative to it's ...
  5. Value Trap

    A stock that appears to be cheap because the stock has been trading ...
  6. Intrinsic Value

    1. The actual value of a company or an asset based on an underlying ...
Related Articles
  1. Markets

    Relative Valuation Of Stocks Can Be A Trap

    This method of valuing a company can make it look like a bargain when it is not.
  2. Fundamental Analysis

    Take On Risk With A Margin of Safety

    More common risk theories can lead to missed opportunities. Find out how margin of safety can propel your portfolio.
  3. Investing Basics

    Top 5 Books For Young Investors

    Reading these respected tomes will help you begin your journey into investing on the right foot.
  4. Active Trading

    Warren Buffett: How He Does It

    We look at the Sage of Omaha's methodology for evaluating value stocks.
  5. Professionals

    Hetty Green: The Witch Of Wall Street

    Hetty Green was the richest woman of her time and possibly the first value investor, yet she's not remembered kindly.
  6. Investing Basics

    The 3 Most Timeless Investment Principles

    Benjamin Graham pioneered cutting edge concepts that propelled other top investors to fame.
  7. Active Trading

    5 Must-Have Metrics For Value Investors

    These quick-and-dirty ratios will help you find the most undervalued stocks on the market.
  8. Active Trading

    The Value Investor's Handbook

    Learn the technique that Buffett, Lynch and other pros used to make their fortunes.
  9. Professionals

    Warren Buffett's Frugal, So Why Aren't You?

    The Oracle of Omaha has a net worth in the billions, but his lifestyle is not as rich as you may think.
  10. Active Trading

    Value Investing + Relative Strength = Higher Returns

    Buying value stocks that are moving higher helps investors steer clear of value traps.

You May Also Like

Hot Definitions
  1. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  2. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  3. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  4. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  5. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
  6. Bank Guarantee

    A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor ...
Trading Center