Value investing is something of a misnomer in many ways as no-one would knowingly buy shares in a company unless they offered good value.
However, in investment circles it has come to mean the purchase of shares that look cheap according to particular criteria.
Historically, this has meant the purchase of shares in companies which have low price earnings ratios (P/Es), a high level of asset backing, or high dividend yields, or indeed a mixture of all three. As such it is seen as the opposite of growth investing, where the investor focuses only on the potential for future earnings growth.
So the heart of value investing lies in comparing two figures:
This is the easy bit. Just multiply the number of ordinary shares in issue by the current price of each share to produce the market capitalisation.
You can look up the Market Capitalisation of a quoted company in the financial pages of most newspapers, in directories like REFS and the Hemscott Company Guide, and on many of the leading financial websites.
This is the difficult bit, because there is no single way of establishing what the value of a company should be. Instead, value investors use a number of different valuation techniques, based on asset values, dividends, earnings, cash flows and other financial criteria, and later in the course we will look at each of these in turn.
When a value investor identifies a discrepancy between the Current Market Value and the Intrinsic Value (according to the criteria he chooses), and the first is lower than the second, he invests. When the gap between them closes, or reverses, he sells, and takes his profit.
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