Definition of Value Company Stock
There are many types of companies traded on stock exchanges, and these companies are often classified by the level of risk they entail, their size, their perceived future value and the investment strategies they lend themselves to. Common classifications include blue chips, penny stocks and growth stocks. A popular type of stock for short-term investors is known as value stock.
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Undervalued
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The key element that makes a value stock is the fact that it is undervalued by the market, or at least that the investor believes it is undervalued by the market. In other words, the investor believes he has identified a company with an intrinsic value greater than the market value attached to its stock.
Short-Term Investment Strategy
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Value stocks are the quintessential buy low, sell high stocks. When an investor believes she has identified a company issuing value stock, she will purchase shares in the company and wait until the market corrects itself and properly values the company. Because of the size and sophistication of the American stock market and the relatively robust level of information available to investors, it is generally assumed that the market will not undervalue a stock for long. For this reason, investors typically do not expect to hold onto value stocks for long periods of time.
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Identification of Value Stocks
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Because value stocks are undervalued by the market, which consists of the accumulated views of millions of investors, they are by definition difficult to identify. Typically, an investor will study a company's financials closely and evaluate the current market in which the company operates as well as the perceived future state of that market in order to estimate the company's future cash flows. The present value of these future cash flows is a common way to value a company. If that value is below the market's valuation, the investor may believe he has identified a value stock.
Outsmarting the Market
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With any value stock, the investor believes that she has outsmarted the rest of the market, and that she sees something the rest of the stock market does not see in the aggregate. This can be very difficult to do, however, as there are many very sophisticated investors -- both independent and institutional -- that spend huge amounts of resources studying stock markets and companies. Nevertheless, many investors are successful at finding value stocks and are able to make money on them.
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References
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