Posted in Finance, Accounting and Economics Terms, Total Reads: 116
Definition: Value Investing
Value Investing involves investing in the stocks on the market which are generally underrated or have low value and have potential to rise. The investor can then sell the stock later on when he thinks the price is correct or above and make gain.
For Value investing to be done, lots of valuation techniques are there to identify the true value or intrinsic value of the stock of a company. The relative valuation is easier and adopted by many investors to value to the stock of a company. The discounted cash flow (DCF) method is another technique which determines the intrinsic value of the stock and an investor can compare whether the stock is over or under valued in the market.
Although DCF takes in much more inputs than relative valuation but it gives a better understanding of a company. But in true sense the valuation of a stock is subjective and may differ from investor to investor. Value investing lessens the risk to the portfolio because investor is aware that a high performer stock today may not be a true good thing to invest. It involves a lot of understanding of the markets and techniques to do value investing. Some important ratios used by value investors are price to earnings ratio, price to book ratio, price to cash flow ratio etc. One of the most famous value investors of current times is Warren Buffet.
For Example: Suppose there is a stock which is trading at $13 in the market. But according to the valuation techniques the stock is undervalued and has the potential to trade at $21. Hence the investor who is doing value investing will invest in the stock to make gain in his portfolio.