The enticement of big money has always thrown investors into the lap of stock markets. Nevertheless, earning money in equities is not comfortable. It not only requires oodles of patience and study, but likewise a heavy wad of research and a sound understanding of the securities industry, among others. The fact that stock market volatility in the last few years has left investors in a state of confusion. They are in a dilemma whether to invest, hold or sell in such a scenario.
Stock market returns can be attained by investing for “growth” or by investing for “value”. Seating for “value” means buying stocks at relatively low prices & Investing for “growth” means buying stocks at relatively higher costs.
When an Individual Investors Invest in the Stock Market with Value Investing, the profitability depends on the factor how he chooses the Stock. And to pick the right choice the individual should receive certain features as a Value Investor:
1. Value investors actively seek stocks they believe the market has undervalued. Investors who use this strategy believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company’s long-term fundamentals, giving an opportunity to profit when the price is deflated.
2. Value investors try to benefit off the investor irrationality which undervalued the stocks. The profit is made by picking out funds with lower-than-average price-to-volume ratios, lower-than-average price-to-wage ratios and/or higher dividend yields. These numbers are compared to a company’s intrinsic value, after which, a value investor invests if the relative value is high enough.
3. Value investors should rely on the concept of “margin of safety”. Value investors need to buy an equity at a large enough discount to allow some room for mistake in the estimation of value.
4. Value investors try to benefit from market overreactions. Market overreactions usually come from the release of a quarterly earnings report of a company.
Example: On May 4, 2016, Fitbit released its Q1 2016 earnings report, and took in a sharp decline in after-hours trading. Average investors needed to jump on Fitbit, selling off enough shares to cause the price to decline. Nevertheless, since Fitbit invested heavily in research and development costs in the first fourth of the year, net income per share (EPS) declined when compared to a year ago. A value investor looks at the fundamentals of Fitbit and understands it is an undervalued security, poised to potentially increase in the time to come.
5. Value investors don’t fall out the herd. Value investors reject the efficient-market speculation, when everyone else is buying, they’re frequently sold or standing back. When everyone else is selling, they’re buying or holding.
6. Value investors don’t buy the most popular stocks. Value investors don’t prefer to purchase popular stocks of the day because they’re typically overpriced, but they are willing to invest in companies that aren’t household names if the financials check out. Value investors believe companies that offer consumers valuable products and services can recover from setbacks if their fundamentals remain solid.
7. Value investors only care about a stock’s intrinsic value. They think about buying a stock for what it actually is — a percentage of ownership in a company. They require to own companies that they know have sound principles and sound finances, regardless of what everyone else is reading or making out.
8. Value investors look for benchmark. They are focused on avoiding permanent losses and on absolute returns, rather than outperforming a benchmark.
9. Value investors invest with a multi-year investment horizon. They typically invest with a multi-year time horizon rather than concentrating on the month or quarter in advance.
In a nutshell, the Individual Investors who make Value investment i.e. Value Investors put more weight on their views about the extent to which they imagine a stock is mispriced in the marketplace. If a livestock is under-priced, it is a good buy; if it is overpriced, it is a good sell. They try to enjoy their rewards by purchasing stocks that are pressed down because their companies are working through periods of difficulty; riding their prices upward, if, when, and as such, companies recover from those troubles; and selling them when their price objectives are accomplished.
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