Value stock definition
/What is Value Stock?
A value stock is a security that is currently selling at a price point lower than the issuing company's fundamentals would suggest. For example, its price might be selling at less than the book value of the business, or the price to earnings ratio is well under the ratio for competing firms. A value investor likes to invest in value stocks, on the assumption that their prices will eventually improve, providing a reasonable return on investment.
Advantages of Value Stock Investing
A key advantage of acquiring value stock is that it is already selling at a low price, so there is little risk of a deep additional decline in the stock price. The assumption here is that all negative performance information has already been revealed by the company, so investors have no reason to discount its stock price any further.
Disadvantages of Value Stock Investing
There are several problems with the value stock investing concept, which are as follows:
Poor underlying fundamentals. There may be excellent reasons why the shares of a business are selling for such a low price, such as declining market share, the loss of a major customer contract, or the presence of a lawsuit that could go against the business. If these issues are present, it is entirely likely that the price of a value stock will remain low for a considerable period of time, and may never increase at all.
Analysis difficulties. The analysis required to determine whether a stock is actually undervalued can be extensive. You would likely need to develop a deep understanding of both the target company and the industry in which it operates, which is very time-consuming. Also, you might make a mistake in your analysis, focusing on factors that turn out to not be relevant to future gains in the valuation of the business. If so, you might invest in a stock and wait a long time for its price to increase - which never happens.