Some of you may have heard about this term before, a value stock. Does it mean that this stock has a high value? Well, to some extent, it is.
Understand a value stock
A value stock is a stock that people trade it at a lower price comparing to the company’s performance according to some fundamental analysis, such as dividends and earnings. Because most investors see this kind of stocks are unfavorable in the marketplace, so the price is lower than it should be.
In general, value stocks have three characteristics in common: high dividend yield, loe P/B ratio and a low P/E ratio.
How to find a value stock
The investing strategy called “Dogs of the Dow” can be used to find value sticks. Investors can buy 10 highest dividend-yielding stocks on the Dow Jones at the beginning of every year, and then adjust their portfolio at the end of every year accordingly.
A value stock usually has a lower price comparing to its dividend yield due to the unpopularity of investors. The unpopularity may have been caused by legal problems or unsatisfactory earnings of a company. They can be found in a sector that trades at a discount.
Risks of a value stock
The unpopularity of the company leads to the skeptical attitude of the market toward it. If you want to earn profits through value stocks, the market should first change the attitude. Therefore, a value stock is considered riskier than a growth stock and is generally more likely to have a longer term to gain benefits. Sometimes, investors may never wait until a value stock starts to gain benefits.