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Value Stock

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A value stock is a stock that, in the opinion of the person calling it a value stock, is undervalued and has good expectations of price appreciation. Various valuation methods are used to discover a value stock, including the dividend yield, which should be high, and the price-earnings multiple, which should be low. Theoretically, the value stock is only temporarily out of favor; when market conditions change and investor interest returns, the value stock will appreciate. A value stock is distinguished from a growth stock, which usually pays little in dividends and is likely richly valued by conventional valuation methods; nevertheless, it is believed to have good price appreciation potential because of its rapid growth. In theory, the value stock is the safer investment because of its underlying value. But in a bull market where investor optimism is heady, a value stock may well perform worse than a growth stock. Many equities cannot be neatly classified as either a value stock or a growth stock, and many if not most investors will include both types in their portfolios.



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