HOW VALUE STOCK INVESTMENT WORKS
- Posted on November 29, 2019
- Stock Market
- By admin admin
Value investing is an investment pattern or model that involves buying stocks or
securities that appear underpriced.
The various forms of value investing are derived from the investment philosophy
first taught by Benjamin Graham and David Dodd at Columbia Business School in 1928, and
subsequently developed in their text in 1934. Several reports say Graham never
used the phrase, "value investing." The term was coined later to help
describe his ideas and has resulted in significant misinterpretation of his
principles, the foremost being that Graham simply recommended cheap stocks.
You
can save some cash by buying a good on sale, provided you know the value of such
good. However, people believe that whether you buy a new smartphone on sale,
or at full price, you would be getting the same phone with the same screen and
camera quality. Stocks follow a similar pattern, that is, a company’s stock price
can change even when the company’s value has remained the same. In the stock
market, for a stock to be classified as being cheap or discounted is when its
shares are undervalued. Value investors often expect to profit from shares they
perceive to be deeply discounted.
Investors
make use of various metrics to find the intrinsic value of a stock. Intrinsic
value is a combination of using financial analysis such as studying a company's
financial performance, revenue, earnings, cash flow, and profit as well as
fundamental factors, including the company's brand, business model, target
market, and competitive advantage
Some
of the metrics used include price-to-earnings (which tracks the company's
earnings to know if the stock price is undervalued), price-to-book (which
measures the value of a company's assets and compares them to stock price),
free cash flow (the cash generated from a company's revenue after the expenditure
has been subtracted) and several others.
Value
investors require some room for error in their estimation of value and often
set their own "margin of safety," based on their particular risk
tolerance. The margin of safety principle is based on the premise that buying
stocks at bargain prices give better chances at earning a profit later when
sold. The margin of safety minimizes money loss if stocks do not perform as
expected.
Value
investors don’t believe in the hypothesis of "efficient market,"
which says that stock prices already take all information about a company into
account, so their price always reflects their value. Instead, value investors
believe that stocks may be over- or underpriced for a variety of reasons.
Trending in the path of value investment
You probably are into
value investing if your ultimate investing goal is to keep your risk of
permanent losses at an absolute minimum while increasing your chances of generating
positive returns. Generally, value investing requires more time to research
stocks in order to measure a company's intrinsic value to determine if there's
a big enough margin of safety.
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