Getting to Know About Undervalued Stocks

A stock that is classified as undervalued is a stock, or a bond, that is not really given the credit it deserves by the market, and as such, carries less of a value in the market than it is actually worth. That is essentially what an undervalued stock is in a nutshell.

These kinds of stock options are bought by investors as they believe they can be sold for a profit in the future, usually in the longer term, and this is another reason why these stocks are branded “undervalued.” The reason why these stocks are of such great value is that investors are essentially buying them at discounted prices, making the margin for profit even more attractive.

When investing in undervalued stocks, the mostly likely outcomes are usually 1 of the following 4:

1. Hold your investment until such a time that the market turns (corrects itself) and the prices go up.
2. Sell your undervalued stocks to another investor and take advantage of the discounted selling opportunity.
3. Buy more while the price is down to make a greater profit when the market rectifies itself.
4. If, over time, the price of the stock does not change, at least you can sell it for a breakeven price.

You can find a complete and quantified list of undervalued stocks on Alpha Spread. This is going to help you decide which is the best stock option for your next investment.

Why are Stocks Undervalued, and How can you Tell?

There are a number of reasons why a stock would be undervalued, some of these include:

• A new management team or Directors,
• New products or services that are having a positive impact on the company’s bottom line,
• A stock split, or
• An Increased demand for related goods or services.
  

  

Now, with that in mind, let’s chat a little about whether a stock is over- or undervalued. When making the decision to invest, investors should do their due diligence on the company in question to determine if the stock is over- or undervalued.

This is done by comparing the current price of the stock against the average earnings per share over time. For example: if a company has an average P/E (Price/ Earnings) ratio of 12 and a P/E ratio of 8, then the stock is considered to be undervalued.

The ratio between these two numbers is the indication of how much the stock is over, or undervalued at that time. The lower the ratio, the better value for money an investor is going to get.

The Ups and Downs of Undervalued Stocks

For investors, there might be benefits and cautions to buying undervalued stocks. Buying at a low price and selling at a higher one is a great way to make a profit, but one can never rule out the possibility of making a loss on your investment.

It does pay to take the necessary time to do the research and get the right stock with the right information before making any hasty investment decisions.