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Value stocks are stocks that are underpriced in the market relative to the company's real value. Investors in this field are the bargain hunters of the stock market. When a company is essentially running strong, with a good dividend, strong sales and profits, low price-to-earnings ratio and so on, but the price of the company's stock in the market does not reflect these strengths, then it gives strong signs to an investor that it's stock price will rise soon as the rest of the market catches on. Investors in value stocks make their money by keeping ahead of the pack.
A low P/E ratio can signal that a stock is undervalued, but a whole host of other factors play in as well, including the company's fundamentals, it's position in the marketplace, it's reputation in the news and the movement of it's stock prices in the past, not to mention the general conditions of the economy. It's a good idea to identify a number of positive indicators before approaching this risky form of investment.
Identifying value stocks can be tricky, and investing can be very risky. It's tempting to identify a stock as undervalued based on only a few indicators and, because time is definitely a factor in purchasing value stocks, many investors consider this enough. But more often than not a stock's price is depressed for good reasons. Investors must take care to seek out information that may be missing from the picture, especially information that the majority of other investors might not have taken the care to find. A low P/E ratio or a 52-week low price, for example, are signs of undervaluation; but unfavorable events in the company's infrastructure, lawsuits, negative press coverage, or poor product performance may present complications for a company that justify its low price, and will perhaps drive prices even further down.
Value stocks are for bargain hunters and stock market jockeys - investors should exercise extreme caution when playing with them.
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Value Stocks - Stock & Company Classifications