Value investing is an investment strategy used by the more prominent investors. Heritage Dictionary says that the “value is a fair price of return”. This definition is a key concept for value investors in choosing the right investments at a given time. Such investors do not look for solid stocks, rather undervalued ones.
This approach signals to invest in those bonds and stocks that are undervalued in relation to similar companies. Although they are not same as cheap, but undervalued investments may still have a high share price as compared to other stocks in the same category. The relative value of stocks is an important thing because it can be found by using tools such as price to book ratio, P/E ratio or some other tools of fundamental analysis.
There are two types of analysis, fundamental analysis, and financial analysis. The fundamental analysis is opposite of technical analysis, which is not about following the graphs or charts that attempt to predict what will be the price of a stock. Rather, fundamental analysis is about using some basics, such as how the financials of a company stand, the credit rating of a company. Furthermore, industry outlook is the keys of such type of analysis. The expenses and revenue of a stock as well as its assets and debts all come into play.
While comparing the quantitative items such as P/E ratios, an important point that you should know is that companies of different industry categories or different sizes often have different scales of a good value. Moreover, there is a possibility that what is cheap for a technology stock might not be cheaper for the companies that are producing consumer goods.
Blue chip stocks are often considered key ingredients in the portfolio of a number of value investors. Such stocks often epitomize that value investing is all about investing in companies with solid earnings history, sizeable market share, a history of dividends and strong financials. Such companies become very attractive to investors when their stock’s market price falls enough making it a bargain.
Holding stocks for the long term is also a value investing as it is not only limited to buying the stocks of good companies at low prices. Such investments generally pay solid dividends that ultimately allow investors to reap all the benefits of market gain as well as the compounding of growth with the dividends. A number of brokerages offer a reinvestment program that allows investors an option to reinvest their dividends automatically and such a compounding effect create impressive returns over the time.
Value investing is all about searching for the stocks that are currently priced at a bargain for their overall value. The market price of a company’s stock often falls due to a number of reasons. For instance, based on the economic reports, change of CEO, or due to other outside forces. For companies that are stable with a long-term history of success, you are advised to hold their securities for the long term.
The value investing offers advantages of not only compounding through dividends, rather the ability to buy stocks of good companies for the long term, at a great price with a positive outlook.