The term “undervalued” or, on the opposite hand, “overvalued” makes reference to a stock currently selling at a price well below or above its assumed actual value. As an example, if a stock is being sold at $25, but should be worth $50 according to predicted cash flow [1] in the future, then the stock is undervalued [2]. On the other hand, a stock that is currently selling for more than its true value displays the opposite scenario, and that stock is overvalued [2]. One of the keys to making money with investments is to select stock from companies that are currently undervalued, so that as the value of those securities [3] increases while you hold them you experience a profit [4]!
Obviously, an investor needs to be quite sure that a business is going to be profitable in the future in order act on it as an undervalued security [3]. Companies with undervalued stocks may have some of the following traits: a stable earning history, no financial scandals in their recent history, a good credit rating [5] (meaning one of AAA, AA, or A stocks), a selling price that is below its tangible asset [6] value, increasing trailing three year earnings over the past decade, not posting a loss during the most recent recession [7], and other considerations.
Some of the best advice for finding undervalued and avoiding overvalued stocks may be to remember that a good stock at a fair price is probably more likely to be undervalued than a bad stock at a cheap price. This is good indicator because good stocks continue to rise over the long term, while bad stocks tend to drop.