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Wednesday, May 11, 2016

Value Investing in stock markets

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Value Investing: Stock market investing has different facets to it. There are numerous types of investing types which suites differently to different investors. One of the more popular type of investing in stock markets is called "Value Investing" . In this post I'll tell more about value investing and can be used as first lesson for someone who is really interested in doing value investing in Stock markets.

Basics of Value Stock Investing:Studies have shown that value investing has done better over time compared to growth investing.But it should come as no surprise that exceptions can occur and under-valued companies aren’t always winners.
What’s the fundamental concept of value investing? The framework was formed in the 1930s by two finance professors at Columbia University, Benjamin Graham and David Dodd. The basic idea is for investors to identify and purchase companies that the markets have undervalued. If and when the markets adjust upwards to the true valuation of those companies, value investors can earn profits on those price increases.

Keep in mind, value investing isn’t about buying every stock that has fallen or is priced low. After all, low share prices can be due to legitimate reasons such as underlying issues with a company’s financial health and prices may remain low if solutions aren’t put in place. Value investors look for companies with strong fundamentals that the market hasn’t fully reflected in the price. They analyze a company’s intrinsic value by looking at various aspects such as its cash flow, earnings, book value, and business model, looking for clues that the current stock price is undervaluing its full worth. A few guidelines that some value investors utilize to select investments include:

• D / E ratio < 1
• PEG ratio < 1
• Market Cap < Book Value
• Cash > Market Cap
• Current assets at least two times current liabilities

Every type of stock market investing has it's merits and demerits or pros and cons so does Value Investing. Following are major pros of value stock investing

• Value investors can take advantage of devalued assets when others are panicking.
• The hype and herd mentality do not have much of an effect on a value strategy.
• Day-to-day price fluctuations and market volatility are not much of a concern to value investors because they are focused on the value of a business instead of external factors.
• Value investors can experience steady and consistent gains that may outperform benchmarks such as the S&P 500.

Since everything in this world is not perfect here are the cons of doing value stock investing(though this is of much lower magnitude when we weigh them with the pros.

Value investors may lose out on larger returns due to searching for companies with a margin of safety. • The under performance of a company’s share price could last for years or may never rise to the investor’s estimate of fair value.
• There may be a lack of liquidity due to the stock’s under performance or low market cap.
• It can be difficult to determine if a stock has bottomed out or could continue falling further down.
• Finding investments can require a lot of time spent on research and analysis.

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