Value stocks / value companies

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    sebkuhnert
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    What are value stocks?

    A value company is a company that appears to be undervalued in the market i.e. its shares are trading at a price lower than their intrinsic value. This intrinsic value can be subjective, but is usually estimated through fundamental analysis.

    Investors seek out these companies in order to buy the shares at a low price, before the market catches up and the price of the shares increases.

    What type of companies are value stocks?

    It’s important to differentiate value companies from companies whose share price has simply declined. A drop in price could be because of an irreparable problem with an ailing company or it could be due to a market overreaction which will eventually correct itself.

    “Value investors” will look for quality companies, not just the cheapest ones, and use fundamental analysis to check their overall health before deciding to invest. They will usually look for companies with high dividend yields and low price to earnings or price to book ratios.

    Value companies can exist in any industry but cyclical companies, which see their earnings fall during economic downturns, can often be undervalued during unstable periods.

    Margin of safety

    When investors are deciding whether or not to invest in a value company, they will usually factor in a “margin of safety”. All this means is that they like to make sure that they purchase the company’s shares at a substantial enough discount to leave some room for error in their analysis and valuation of the company.