What is a Value Stock?

by Investing School on April 15, 2011

The term “Value Stock” refers to a stock that has been selling for a price that is lower than it should when compared with the amount that its fundamentals would suggest, according to earnings, dividends, sales, and other considerations. As such, these kinds of stocks tend to be viewed as undervalued by someone who is a value investor, and they may capture his or her interest as a possible investment. Some of the more frequently seen characteristics of these kinds of value stocks could be a lower price-to-book ratio, a higher dividend yield, or a lower price-to-earnings ratio, etc.

Taking these traits into consideration, value stocks are generally thought of as some really good stocks at some really great prices! This is as opposed to some really great stocks at really good prices, which does not have as much potential upside. In normal circumstances, value stocks can be distinguished from growth stocks, which are sold at higher multiples to increase earnings and cash.

An investor who deals in value stocks may be of the mindset that the markets are not always terribly efficient, and operates with the understanding that it is feasible to discover companies with stocks that are selling for less than they should be worth.

One way that some people will attempt to discover some value stocks is by looking at the “Dogs of the Dow” investing list. This can lead some investors to an actual “Dogs of the Dow” strategy of purchasing the ten highest dividend-yielding stocks each year, and then altering the strategy each and every year.

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{ 1 comment… read it below or add one }

John April 20, 2011 at 6:21 am

Nice article, but you could have mentioned that some of the most successful investors ever like Warren Buffett only invest in value stocks.


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