Value Stocks

A beginner in investments spends an extraordinary amount of time figuring out the various strategies, stock types and jargons that are part and parcel of the stock arena. We’ve been told time again that making money out of stocks requires an understanding about the stock market, some patience and effort; and a lot of planning. Yet many an avid investor has made a mark by simply following the techniques of the top investors.

Benjamin Graham and Warren Buffet are two such examples of master investors who have amassed an incredible amount of wealth through stock success. It is through their words of wisdom that many investors have been encouraged to pave their own path in this money-making market.

While the original theory of value investing and identifying value stocks has evolved since its inception by Graham, it’s certainly a tried and tested method worth looking further into.

What Are Value Stocks?

Value stocks are those which are found at discount rates in the stock market despite the indications of a higher intrinsic worth by fundamental analysis.

What this means is that the basics of the company point towards the likelihood of acceleration in the business’ worth.

The concept of value stocks is based on a number of factors:

The intrinsic worth of a company is its true value. While the price of a stock is constantly changing, it is the fundamental factors of a company that determine what it is actually worth.

The up-kept qualitative factors of a company along with its financial records are generally a testament to its past glory and also speak of the strides it is likely to make in future.

The key then to profiting through value stocks is to find shares that are being sold at prices far lower than their intrinsic worth.Margin of safety

While clearly buying at a discount price benefits the investor, there is no point in investing in stocks which will add no gains to your portfolio. This self-preservation technique says that it’s best to buy when the price of stock reaches a value, equivalent to the intrinsic value of the stock, discounted for all risk factors that may affect the same. The advantage of this safety limit is to ensure a profit while downsizing the risk.

The efficient market hypothesis states that the fundamentals of a company are reflected in the price of its stock. Value investors shun this theory and instead choose to believe that it is investor perceptions that lead to the over or under pricing of a stock in the stock market.

Therefore, as investors’ moods are in constant imbalance, the price of a stock will take its time to self-correct, invariably attaining its intrinsic potential.

The value investor believes that it is the herd mentality of people that contributes to stock price changes.

Since it is the real worth of a company that holds the most weight for a value investor, this particular strategy discounts the patterns of the crowd.

When the average investor is in a buying overdrive, the value investor is intent on selling his shares. On the other hand, when the rest are out selling their stock, this strategic investor buys in bulk.

This approach of opposite action works on the belief that the fundamentals of a company are still intact. When the investor frenzy settles, the company will eventually prove its worth by rolling in profits.

Characteristics Of Value Stocks

With these core factors in mind, the value investor turns to selecting the value stocks. There are a certain characteristics worth looking at while estimating the intrinsic worth of a company: