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What is a 'Value Stock'

A value stock is a stock that tends to trade at a lower price relative to its fundamentals, such as dividends, earnings and sales, making them appealing to value investors.

BREAKING DOWN 'Value Stock'

Common characteristics of value stocks include a high dividend yield, low price-to-book ratio and/or a low price-to-earnings ratio.

An easy way to attempt to find value stocks is to use the "Dogs of the Dow" investing strategy by purchasing the 10 highest dividend-yielding stocks on the Dow Jones at the beginning of each year and adjusting the portfolio every year thereafter.

A value stock is a security trading at a lower price than what the company’s performance may otherwise indicate. Investors in value stocks attempt to capitalize on inefficiencies in the market, since the price of the underlying equity may not match the company’s performance.

Value stocks are contrasted with the other of the two basic approaches for equity investing, growth stocks. Growth stocks are equities of companies with strong anticipated growth potential.

A balanced diversified portfolio will have both value stock and growth stocks. These portfolios may be referred to as a blended portfolio.

How to Spot Value Stocks and Assess Risk and Return

A value stock will have bargain-price as the company is seen as unfavorable in the marketplace. A value stock will have an equity price lower than stock prices of companies in the same industry. Negative publicity relating to unsatisfactory earnings reports or legal problems are indicators of a value stock as the market will negatively view the company’s long-term prospects.

A value stock will most likely come from a mature company with a stable dividend issuance that is temporarily experiencing negative events. However, companies that have recently issued equities have high value potential as many investors may be unaware of the entity.

For all their potential upsides, value stocks are considered riskier than growth stocks. This is because of the skeptical attitude the market has towards the value stock. For a value stock to turn profitable, the market must alter its perception of the company, which is considered riskier than a growth entity developing.

For this reason, a value stock is typically more likely to have a higher long-term return than a growth stock because of the underlying risk. The investing duration must be taken into consideration a value stock may need some time to emerge from its undervalued position. The true risk in investing in a value stock is that this emergence may never materialize.

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