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What is value investing? Here are the basics

Value investing means investing in stocks that are currently trading for less than their book, or intrinsic, values. The term can be applied to any other investment that sells in the market for less than its book value.

Value investors employ a number of strategies to identify undervalued stocks. In general, they seek reasons that a stock's potential may have been overlooked and that its actual trading price may soon increase.

Bad short-term outlook

For instance, a stock may be undervalued because its short-term outlooks are poor. Maybe it is in a depressed industry, or perhaps sudden growth in a new market has temporarily decreased earnings. Management may be overly conservative and may not promote the company as much as it deserves. A variety of reasons may contribute to the stock's undervaluation. If these problems appear temporary, a value investor may decide that the stock is undervalued. But is now the best time to purchase this stock? What is the likelihood that the stock price will increase in the near future?

Looking for the right nudges

Value investors aim to identify variables that may soon push up the price of a stock: new management, a revised stock analysis by Wall Street, or a corporate takeover, for example. These variables may relate to the internal operation of the company, such as new management or a new product introduction. Or, they may be external variables, such as a revised stock analysis, falling interest rates, or an upturn in the industry.

Trader Peter Tuchman, center, works on the floor of the New York Stock Exchange. (Photo: AP Photo/Richard Drew, File)
Trader Peter Tuchman, center, works on the floor of the New York Stock Exchange. (Photo: AP Photo/Richard Drew, File)

Value investors think carefully about the long term

While value investing is long-term investing, most value investors would not purchase a value stock that they did not expect to turn around two or more years down the road at most. Why tie up their funds for that period when they could instead invest in a stock that has a greater probability of accelerating upward sooner? Value investors usually work to identify variables that may push up the price of a value stock in the near future.

Dive Deeper: What to look for in value investing

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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