We have all heard stories about underdogs who go on to become massively successful. In the investment market, everyone wants to invest in stocks that are under the limelight for all the right reasons. No one wishes to invest in a stock that hasn’t been performing well. Of course, who would like to set themselves up for a loss? However, value investing works differently. Keep reading to find out all about this investment tool that stock market moguls like Warren Buffet swear by.
Value investing – what is it?
Value investing is all about looking at the intrinsic value of stocks. It is an investment strategy using which investors put their funds on a stock that has been underappreciated by the market. They do this in the belief that these stocks will perform well in the future.
Value investors actively seek out stocks that they think are being undervalued by the market. Using this buy and hold strategy, they are able to purchase a stock for cheap and reap significant returns when its intrinsic or book value shines through. However, it is not so simple. How do you figure out which stocks are underperforming? Moreover, out of the underappreciated stocks, which one seems to have a promising future? Read further to understand the basics.
Additional Read: Growth vs Value Investing: Choosing your investment strategy
Guide to value investing
Before you embark on the journey of value investing, you must know some basic principles that will help you succeed.
Evaluate the intrinsic value
The ‘intrinsic value’ is the most important term you will encounter while value investing. This is the real or intrinsic value of the stock, which has plummeted due to global trends or market changes. When this happens to a trustworthy, reputed company, you can invest in their stocks at a low price.
Do your research
Before investing, you need to research thoroughly on several factors. Make sure that the company you’re investing in is reliable and has a good track record. Take your time to understand the company’s future business plans, financial structure and short-term profits. Don’t disregard a company simply owing to unpopularity. Value investing is all about finding hidden gems.
Keep a margin of safety
This is the most important principle of value investing. When buying a low-valued stock, buy it at least two-thirds of its original or intrinsic value. Since the stock is already underperforming, changes of it doing worse after you buy it are low. So, whatever growth it experiences will be your guaranteed profit. Suppose you buy a stock whose intrinsic value is Rs. 100 at Rs. 60. When it reaches its intrinsic value, you will make a Rs. 40 profit, and if it surpasses this value, you will make greater profits.
Additional Read: Safe investments to ride out market volatility
Start your value investing journey with Tata Capital’s Moneyfy app, a platform where you start and manage your investment journey smoothly. Moneyfy allows you to set goals, compare investment options based on various parameters and invest in the best products.