What It Is:
A value stock is a security that is trading at a lower price than expected given the performance of the company and key performance indicators of the stock itself.
How It Works/Example:
A value stock may have a high dividend yield (i.e. what percentage the stock yields relative to its price), low price to book ratio (i.e. current closing price of the stock as a percentage of the latest book value per share), and even a low price-to-earnings ratio (i.e. current share price as a percentage of its per share earnings). All of these indicators are based on the fact that the market is not always efficiently matching price with performance. Investors are betting that this inefficiency gives them an opportunity for substantial gains.
Why It Matters:
A value investor seeks stocks that are trading at a price less than they are worth. There are investment services and guides that monitor the indicators of value stocks, but investors must interpret these analyses and make decisions based on their own instincts and what they think is the value, performance, and the underlying fundamentals of the company itself and its stock.