Value Investor Stock Market Strategies

If you buy stock by looking at the value of the company that issues it, you are a value investor.

This is simply a stock market investor who looks at the value of a company in the market, and then decides whether or not to purchase those stocks based on their current price.

This decision will be based on whether the stock is at a good price, and if it provides good value at that price.

Usually this is done by analysing a company’s earnings, assets and level of debt, something which is also called fundamental analysis.

Other types of stock market investors may use technical analysis, which involves looking at stock charts and statistical information such as trading volume and historical stock prices.

Investors may also use a combination of both fundamental and technical analysis when deciding upon which stocks to buy in the stock market.

Although most successful long term investors tend to use fundamental analysis as their primary investment strategy.

Some of the things to look out for in companies when using the value investor approach include:

Balance Sheet

A balance sheet can be used to determine a company’s net worth. A value investor will choose to buy stocks from a particular company if they feel that those stocks should be priced higher than what they currently are.

A value investor therefore looks for stocks which are undervalued, rather than just buying stocks because they are cheap.

Income Statement

An income statement can be used to determine how profitable a company is.

This is an important consideration for any type of stock market investor, because there is no point in investing in a company if they are loosing money year after year.

A strong company which is likely to perform well in the future will therefore display increasing yearly profits as this signals growth.

Hidden “Golden Stocks”

Value investors in the stock market are continuously on the hunt for bargain buys.

As a result, they tend not to go for the companies everyone is talking about, but rather try to find that hidden gem which others have overlooked.

Understanding The Types Of Stock Market Value

As a stock market investor, understanding the value of stocks is absolutely critical to making successful investments.

Below you will find a brief description of the different types of value in the stock market and the effect they can have on your investments.

Stock Valuations

If a stock is quoted at $40 per share, this price is a reflection of the stock’s market value.

The total market valuation of a company’s stock is also referred to as its market cap, or market capitalisation, which can be calculated as follows:

Market capitalisation = share price x number of shares outstanding

The market value of a stock is set by the market, via the investors who trade each day in the stock market.

Companies that people think are going to do well will see their stock value increase as more investors buy their stocks.

However, it is important to remember when investing in the stock market that market value may not necessarily reflect the true value of a company or the stability of that company.

For example, WorldCom had a multi billion dollar stock value, but eventually went bankrupt and their stock became worthless.

So although market valuation can be a useful guide, it should by no means be the only source you use when making your investment decisions.

Accounting Valuations

Accounting value, also called book value, looks at whether a company’s market value is at a reasonable price compared to the company’s intrinsic value.

This is done by looking at the company’s balance sheet, from which you can see assets and liabilities which determine a company’s net worth.

Accounting value usually tends to be lower than market value, and if the market value is much higher than the accounting value, an investor may be reluctant to invest in that company because this can indicate their stock is overvalued.

Therefore, the closer the market value is to the accounting value, the safer that investment is considered to be.

Earnings And Sales Valuations

The bottom line when it comes to the value of stocks in the stock market is how much money a company is making. As a result, some stock market analysts prefer to value stock based on a company’s income statement.

This value is usually expressed in ratios, such as the price to sale ratio and the price to earnings ratio. In both of these cases, price is used as a reflection of a company’s market value.

The closer the market value is to a company’s intrinsic value (their ability to make money) the safer that investment is considered to be.