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Value stock definition
A value stock is a share that trades at a low price relative to the company's fundamentals, such as its earnings, assets, or book value. Investors buy it on the view that the market has underpriced a sound business, expecting the price to recover toward fair value.
These shares usually come from established, steadier companies and often carry a low P/E ratio and a dividend. Investors screen for them using measures like the price-to-earnings and price-to-book ratios, hunting for prices that sit below what the underlying business seems to be worth. The bet pays off if the market reprices the share upward over time.
A value stock is the counterpart to a growth stock. A value stock is priced cheaply against its current earnings or assets and leans on a recovery in sentiment, while a growth stock trades at a premium on the expectation of fast future expansion. Value investing buys present worth at a discount; growth investing pays up for what a company might become.
Value stock Example
You find a value stock earning USD 5 a share and trading at USD 50, a P/E ratio of:
USD 50 √∑ USD 5 = 10
You pay just USD 10 for each USD 1 of current earnings, well below a growth stock on a P/E of 40. If the company also pays a USD 2 dividend, you collect a 4% yield while you wait for the market to reprice it.
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