What Is Value Investing? A Brief Introduction
Investing in stocks can turn out to be a lucrative venture if you do it correctly. If you are in doubt, then why is it that a significant proportion of investors are turning back to stock trading? The answer is simple; stocks can make you rich fast.
However, you still have to develop the right investment opportunity strategies for you to reap big. And this could mean looking at places where not many people are focusing. Value investing is one of those areas.
You’ve probably heard about it if you’ve been keen on trading. But do you understand the concept well enough to leverage it? Here’s a brief guide to get you started.
1. What Is Value Investing?
The market tends to overreact to news that has a bearing on the stock prices. This results in the movement of stock prices in the short-run which most often won’t be in line with a company’s long-term fundamentals.
Value investing refers to buying stocks that are trading for cheaper prices than their book value due to the market overreactions. Value investors tend to shun the herd mentality. They rely on their financial analysis to buy stocks instead of following market trends.
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2. Volatility Doesn’t Equate to Risk in Value Investing
Many people in the stock market assume that the volatility of a stock option is a measure of the risk of the investment opportunity. These individuals, therefore, trade based on this concept.
They sometimes end up regretting it, because they miss on a stock that was initially volatile but gained over time to be profitable.
In value investing, the risk is defined as the permanent loss of capital. To evaluate the risk of an investment, you have to analyze the fundamentals of a business thoroughly. Doing so will help you develop an accurate picture of the entity’s risk.
Straightforward formulas for calculating risk will give you the statistical realities of the venture. But risk encompasses more than that. There are other factors at play which you must consider; for instance, how future opportunities for the venture will affect the stock prices.
3. Buying Stock as an Investment
Did you intend to buy a stock option cheaply then profit from selling it when prices are high? Well, this goes against the intentions of value investing. As a value investor, you have to look at stock from a CEO’s perspective.
The idea is to buy stocks from companies that have undervalued them. But you have to choose only the companies whose prospects of improving the share value are high.
Consider yourself a sleeping partner in any company that you buy a share from. Yes, you won’t have an active role in the day-to-day operations. But you’ll enjoy the rewards or suffer the consequences depending on the stock’s performance.
Reap More by Changing Your Mindset
The stock market can offer quick cash buy-and-sell for the short run. However, your intention should be to create wealth as a long-term strategy. Buying and selling shares on an impulse will only keep you in a vicious cycle.
Value investing enables you to grow as the stocks of your investment choice grow. It’s a patient yet fulfilling process. For more articles on stock trading, browse this page.