Value Investing and Growth Investing

Value Investing

Value investing includes buying an undervalued stock and then selling it when the market at last recognizes the company's potential. In simple terms, value investing can be considered as investing in something that the market presently values less than what it is actually worth. The concept of "value" might be different for different investors. While some of the investors consider only the present assets of a company for determining the intrinsic value of its share, others estimate it based entirely on the company's growth prospects.

How is Value Investing Done?

Value investing usually involves the buying of under-priced shares. Now, whether the share is under priced or not is established or known by some forms of fundamental analysis. Examples of such under priced securities include stocks that have -

• High dividend yields.
• Low price-to-earnings multiples.
• Low price-to-book ratios.

Also, stocks that are trading at a discount to their book value may be considered value investments. Other strategies comprise opting for stocks with low price-to-cash-flow ratios. There are several ways of evaluating the success of value investing. One could indulge in value investing simply by observing the strategies of well known investors.

Benefits and Dangers of Value Investing

The ability to judge and select a company with strong fundamentals can give significant earnings in the long run. It has been empirically noticed that value stocks outperform growth stocks. By compounding through dividends, value stocks can be among the most profitable investment options in one's portfolio. However, owing to the huge number of companies that float their shares in the market, it becomes very difficult to find a stock of a promising company which is undervalued by the market.

Besides, over dependence on the model of value investing can minimize one's earnings potential. It is important that investors take their sentiments into account, as this plays a vital role in the movement of stock prices in the market.