October 20, 2018

Picking Stocks based on value

How does stock investor pick stocks based on value?

Investors look for company’s shares which represent a good value. Let me explain it to you in a simplest way.

Example:  Person wants to buy a TV. Whether he buys a new TV when it’s on sale or when it’s at full price, he is getting the same TV with the same screen size and the same picture quality. The obvious assumption that we have to make is that the value of the TV will not depreciate with time as new technology becomes available. Stocks are the same way: the company’s stock price can change even when the company’s intrinsic value is the same. Stocks, like TVs, go through periods of higher and lower demand. These fluctuations change prices, but they don’t change what you’re getting. Whatever price what you are paying to own the TV is similar to whatever price you are paying to own a  stock, you are still getting the same company stock – but the price at which you buy is important & that is the value you are paying to own that stock.

The only difference is that, unlike TVs, stocks will not be on sale at predictable times of year such as Ganesh Chaturthi, Diwali, and their sale prices won’t be advertised. If they were, stocks on sale would be less of a bargain because more people would know about the sale and drive the price up. 🙂

A value stock – is a stock that tends to trade at a lower price relative to its fundamentals (e.g., dividends, earnings and sales) and thus considered undervalued by a value investor. Common characteristics of such stocks include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio. A value stock is a security trading at a lower price than how the company’s performance may otherwise indicate.

                           At what price to buy, how many shares to buy?

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