What is Value Stock?

A value stock is a security that is currently selling at a price point lower than the issuing company's fundamentals would suggest. For example, its price might be selling at less than the book value of the business, or the price to earnings ratio is well under the ratio for competing firms. A value investor likes to invest in value stocks, on the assumption that their prices will eventually improve, providing a reasonable return on investment.

Advantages of Value Stock Investing

A key advantage of acquiring value stock is that it is already selling at a low price, so there is little risk of a deep additional decline in the stock price. The assumption here is that all negative performance information has already been revealed by the company, so investors have no reason to discount its stock price any further.

Disadvantages of Value Stock Investing

A problem with the value stock concept is that there may be excellent reasons why the shares of a business are selling for such a low price, such as declining market share, the loss of a major customer contract, or the presence of a lawsuit that could go against the business. If these issues are present, it is entirely likely that the price of a value stock will remain low for a considerable period of time, and may never increase at all.