Overnight wealth is a dream for many, but the reality is often far different. You may dream of investing in the stock market and hitting the jackpot overnight, but that’s an unrealistic view of the market. Investing is a marathon, not a sprint.
But how do you make sure your marathon doesn’t end in a crash?
You minimize risk by buying affordable stocks that have future growth potential. That’s the secret – undervalued stocks.
And we’re going to tell you all about them.
What Are Undervalued Stocks?
Undervalued stocks are stocks that are selling below their presumed intrinsic value. The intrinsic value of an asset is the price an investor would reasonably pay for that asset.
Whether or not a stock is undervalued can be subjective and is open to interpretation.
Also, an undervalued stock is not the same as a cheap stock. The idea behind finding and purchasing undervalued stocks is that they have the potential to perform well in the future, as opposed to staying cheap.
An undervalued stock is the opposite of an overvalued stock, which is a stock selling higher than its intrinsic value.
The Value Investing Strategy
So why should you invest in undervalued stocks? Because of their affordability and potential to perform well long term, some investors use a value investing strategy.
They look for affordable stocks and purchase them at their undervalued cost, hopeful for a return. They also avoid overvalued stocks for fear of an unfavorable return.
How Do Stocks Become Undervalued?
There are many reasons why a stock could be considered undervalued.
One possibility is that it’s simply a smaller company. A company neglected by investors may have undervalued stock solely because no one is talking about them.
A company’s stock may also be affected by severe reputation damage. This could be due to a bankruptcy, where the newly reorganized company is free of its debt burden, but the stigma of bankruptcy remains.
Finally, a company’s stock may become undervalued when the overall economy is down. That doesn’t mean there isn’t value in a specific company, it just means overall investor confidence is down.
Finding Undervalued Stocks
There are a few different ways of finding undervalued stocks.
You can look at the cash flow and dividends of the company.
You can compare the stock to similar companies operating in the same industry, and compare apples to apples instead of apples to oranges.
Also, you can look at the overall finances such as the income sheet, balance statement, and quarterly earnings reports.
Finally, you can check the ratios. One ratio to consider is the current ratio, which is the companies assets divided by its liabilities. This ratio can give you an overall picture of the company’s health.
What if You Are Risk Adverse?
Like all investments, there is an element of risk to buying undervalued stocks. Not everyone has the time to do the research or understands the market well enough to make wise investments.
Fortunately, there are third parties who can advise you on how to pick stocks. They do the heavy lifting of research and analysis in an effort to increase your long-term gains. They can help you find the best, undervalued stocks to buy.
Keep an Eye Our for Undervalued Stocks
So what is undervalued stock? Put simply, it’s a stock selling at a lower than expected price. It may provide long-term gains, but of course, that isn’t guaranteed.
We hope you found this article on undervalued stocks informative. If you’re seeking more advice, check out our Invest Your Money section.