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Value investing |
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Value investingValue investing is something of a misnomer in many ways as no-one would knowingly buy shares in a company unless they thought that the shares were good value. However, in investment circles it has come to mean the purchase of shares that look cheap according to particular criteria. Historically, this has meant the purchase of shares in companies which have low price earnings ratios (P/Es), a high level of asset backing, or high dividend yields, or a mixture of all three. As such it is contrasted with growth investing, where the investor focuses only on the potential for future earnings growth and is prepared to pay much high P/E multiple.So the heart of value investing lies in comparing two figures:Current Market ValueMultiply the number of ordinary shares in issue by the current price of each share to produce the market capitalisation. You can look up the market capitalisation of a quoted company in the financial pages of most newspapers, and on many financial websites.Intrinsic Value of the CompanyThere is no single way of establishing what the value of a company should be. Instead, value investors use a number of different valuation techniques, based on asset values, dividends, earnings, cash flows and other financial criteria.When a value investor identifies a discrepancy between the Current Market Value and the Intrinsic Value (according to the criteria he chooses), and the first is lower than the second, he invests. When the gap between them closes, or reverses, he sells, and takes his profit.Value investingIn the context of asset management, mutual funds, and hedge funds, the a style of investment that focuses on securities with low price to earnings ratios or low price to book ratios. Some of these securities are deemed cheap and are viewed by manager as having a lot of profit potential.Value investing Similar MatchesFormula investingFormula investingA formula-based investment technique in which investment decisions are made using predetermined timing or asset allocation models, e.g., dollar cost averaging. Graham and Dodd method of investingGraham and Dodd method of investingAn investment strategy based on security analysis and identification. Investors buy stocks with undervalued assets speculating that these assets will appreciate to their true value. Coattail investingCoattail investingA risky trading practice of making trades similar to those of other successful investors, usually institutional investors. Contrarian investingContrarian investingIgnoring market trends by buying securities that the investor considers undervalued and out of favor with other investors. Passive investingPassive investingPutting money into a profitable business opportunity that is deemed passive by the IRS and thus benefits from tax deductions. Further Suggestionsgrowth investing |
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