Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Undervalued

What it is:

Undervalued describes a security for which the market price is considered too low for its fundamentals. Some metrics used to evaluate whether a security is undervalued are P/E ratio, growth potential, balance sheet health, etc. It is the opposite of overvalued.

How it works (Example):

A stock may become undervalued in one of two ways. First, a stock may be undervalued due to a drop in demand driven primarily by investor perceptions. If a drop in price is not justified by the issuing company's actual financial status as manifest by its fundamentals and analyst growth projections, the security could be undervalued.

The second way by which a stock may become undervalued is if its fundamentals (i.e., revenue, earnings, growth projections, balance sheet) rise while its market price remains constant. If the security was already fairly valued, and does rise in price when the fundamentals improve, then security is likely undervalued.

Why it Matters:

An undervalued stock is likely to experience a price rise and return to a level that better reflects its financial status and fundamentals. Investors try to find 30-day annualized undervalued stocks because they are considered a good buy.

Related Terms View All
  • Lease Payments
    Leases can be for a variety of assets, though real estate often comes to mind first. For...
  • Notary
    A notary public goes through training and obtains an official seal to affix to paperwork...
  • Good This Week
    For example, let's assume an investor wants to sell 100 shares of Company XYZ at $25 per...
  • War Babies
    Let's assume Company XYZ builds jets for the Navy, and Company ABC builds guns for the...
  • Extended Trading
    In the United States, extended trading occurs between 8:00 a.m. and 9:30 a.m. Eastern...