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. Undervalued

    A financial security or other type of investment that is selling ...
  4. Price-Earnings Ratio - P/E Ratio

    A valuation ratio of a company's current share price compared ...
  5. Net-Net

    A value investing technique in which a company is valued solely ...
  6. Price-To-Book Ratio - P/B Ratio

    A ratio used to compare a stock's market value to its book value. ...
RELATED FAQS
  1. Why should a growth investor consider the metals and mining sector?

    Growth investors consider investing in the metals and mining sector primarily due to the general trends and changing face ... Read Full Answer >>
  2. Why would a value investor be drawn to the financial services sector?

    A value investor is drawn to investing in the financial services sector for two principal reasons. First, financial service ... Read Full Answer >>
  3. What is the difference between Economic Value Added (EVA) and Market Value Added ...

    There are numerous ways that investors and lenders can estimate the valuation of a company. This becomes increasingly important ... Read Full Answer >>
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

    Why Warren Buffett Envies You

    The Oracle of Omaha can move over - there's a new investor in town.

You May Also Like

Hot Definitions
  1. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  2. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  3. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  4. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  5. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  6. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
Trading Center