What is value Investing
Value Investing is an investment approach that seeks to earn profit from the companies that are undervalued but have a solid long-term prospectus. In value investing investors consider a stock to be undervalued when it is trading at a price lower than its intrinsic value
The idea behind the value investing is to buy a stock that trade at a significant discount to their intrinsic value (they are cheaper than their true value). Such investment approach requires in-depth knowledge of the financial market and the company’s finances.
How Value Investing works?
Let’s understand the value investing by an example.
For example- A company TCS is being traded at Rs.80. When you analyse the company finances, you infer that the company has an excellent financial structure that brings its intrinsic value to Rs.100. Investors believe that the share price will increase form Rs.80 to Rs.100 in the future. Conversely. If you find the company TCS financial metrics poor and the intrinsic value to be Rs.60, it implies that the stock is overvalued at Rs.80.
How to derive Intrinsic Value?
The intrinsic value is the maximum value of the stock at which you can buy the stock without incurring losses when you decide to sell it at a future date. There are various aspects of the company finance need to determine for value investing.
• Earnings before Interest and Taxes (EBIT): Company’s cash flow excluding expenses and profits.
• Earnings Before Interests, Taxes, Depreciation, and Amortisation: Company’s cash flow before calculating the amortisation and depreciation costs.
• Discounted cash flow: Calculating an assets value where the current cash flow is more than the suture cash flow worth.
• P/E ratio: P/E ratio is the relationship between the company’s share price and its earning per share (EPS).
• P/B ratio: P/B is the value of a company’s assets per unit and share price per unit.
Advantages of Value investing
• Reduce Risk
• Good profit return
• Suitable for long-run
Disadvantages of Value Investing
• Not suitable for short-run
• Time taking process
• In-Depth knowledge of financial market
If you want to invest but do not have a demat/trading account then visit the following links to open your account.
To open your account in Zerodha
To open your account in Angel Broking
To open your account in Alice Blue
Also Read: What is Value Stock