Value Investing Definition
Define Value Investing In Simple Terms
Value investors believe that the market tends to overreact to news, both positive and negative, and so a price reduction in a stock does not always correlate with a reduction in value.
They seek to take advantage of stocks they believe the market is undervaluing in order to profit off valuable but inexpensive stocks.
What Does Value Investing Mean In Finance?
One of the ideas behind value investing is that if you know the true value of something, then you can save money by buying it when it sells at a discount.
For example, it doesn’t make financial sense to buy a car for full price now if it will go on sale later and can be bought for less.
The same principle applies to stocks.
Example of Value Investing
Because discounts on stocks are not usually advertised or predictable, part of value investing involves doing detective work on changes in stock prices.
Furthermore, value investors also have to determine what the intrinsic value of a stock is.
Some of the most common methods value investors use to determine the intrinsic value of an investment are the price-to-book ratio, the price-to-earnings ratio, and free cash flow.