Value investing is the act of investors selecting stocks based upon a perceived value rather than solely looking at pricing trends in the stock’s history.
In fact, value investing may seem to go against convention investment wisdom in many cases because value investors tend to seek out stocks that they believe the market has undervalued. This can include so called “penny stocks” at times, but is more often associated with undervalued stocks on a major exchange such as NASDAQ or the NYSE.
Value investors strategically and actively seek stocks that trade at low values with the intention of getting out of the investment when the market has corrected what the value investor sees as an error in valuation of the stock.
Value investing requires above average insight and savvy concerning the potential value of a particular company’s stock, but it requires a keen sense of perception and skill of research as well.
It is not necessarily riskier than traditional market investing, but does require that the investor be correct about the market’s underestimation of a particular company. When the value investor is correct, she stands to make a lot of money. When she’s wrong she can be sitting on a worthless or low value stock for a long time.
Value investing is based on the idea that the stock market overreacts to both good and bad news regarding companies and the effects of those pieces of information on the potential for a stock’s performance.
This assumption on the part of value investors is usually correct as the stock market is often full of nervous investors who will pull their investments at a moment’s notice or the first, smallest signs of trouble.
Considering that Microsoft was once a value investor’s dream, one can see how value investing can often lead to a generous payday for those investors wise enough to see what’s coming down the road.
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