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What is value investing?
Value investing is a strategy used by investors, to find and purchase stocks when they are underpriced at a discount to their normal value. Using a method called fundamental analysis, investors assess the actual value of the stock, and then track the stock to purchase it at the most profitable opportunity. Think of it like doing your research on a purchase you want to make for a while. Then you keep an eye on the price of that purchase, and once it falls to the right spot you go for it, knowing it’s a great deal.
Key Takeaways
- Value investing is an investment strategy of buying stocks or securities that appear to be undervalued by the market.
- A typical investing timeframe for this strategy can be medium to long.
- Risk tolerance can usually be described as moderate.
- Value investors have a variety of options to invest in, including individual stocks, ETFs, and mutual funds.
Value investing focuses on paying low prices for investments relative to their intrinsic values. Value investors believe that sometimes market movement may be an overreaction to short term news and that this can cause stock prices to undervalue a company's potential worth. Companies that can be classified as value stocks are typically in the maturity or decline stage of the business cycle.
Value investors use fundamental analysis, which is kind of like reviewing a company’s economic story to try and find clues that uncover its fair value. This can mean analyzing a company's public financial statements and other economic reports to help determine what the intrinsic value of that company and its stock is. Certain key ratios, that typically involve cash flows, are used to help make the process easier, and allow investors or analysts to compare different companies in the same industry.
Value investing can be a time-consuming strategy if investors do the valuation themselves.
Advanced tools such as Screeners (in WebBroker) from TD Direct Investing can help filter a list of stocks based on your criteria and lets you dive deeper into a company's financial data, along with information from other financial valuation companies as well as price targets and ratings from numerous analysts to help form your own valuations.
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