What Are Value Stocks and Why Should You Invest in Them?
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What are Value stocks?
Value stocks are called ‘Value’ stocks because they offer good value compared to their long-term returns. These stocks are usually undervalued compared to their performance in the market.
In other words, these are normally established companies that grow steadily year on year, which don’t carry as much risk as some Growth stocks, and which cost relatively little compared to what they offer in return.
It’s also worth noting that a Growth stock can become a Value stock if it starts experiencing adverse events which lower its prices, but which don’t necessarily mean that the company will go bust.
What are the benefits of Value stocks?
Value stocks represent stability within a portfolio. With Growth stocks, you’re putting your money into a business making huge leaps in innovation which can sometimes fail.
Value stocks are often companies that either innovate over longer periods, or ones which provide an evergreen service that doesn’t require a ton of marketing.
Value stocks often pay dividends, too, as they’re more interested in long-term growth. Whereas Growth stocks will pour as much money as they can back into growing the business.
Why choose Value stocks over Growth stocks?
You could have a portfolio full of Value stocks that could potentially generate a steady return for you over a number of years. If this suits your risk appetite, then it’s a perfectly legitimate way to go.
Having both Growth and Value stocks as part of your portfolio, however, allows you to benefit from both Growth-focused short-term returns, and Value-focused dividends and stability.
How to find Value stocks
There are methods of identifying Value stocks using ratios like Price-to-Earnings and Price-to-Book, but if you’re just starting out, there are two easy ways of identifying a Value stock.
Check the dividend yield. A lower stock price coupled with a high dividend yield can be a sign of a mature and stable company, one which could be considered a Value stock.
Check company growth. If the price of a stock remains reasonably stable and affordable, but the company itself is growing year on year, it could be a sign of a Value stock.
Are Value stocks a good investment?
The general consensus is that yes, Value stocks are a good investment, either on their own, or coupled with Growth stocks.
Diversity is crucial for any investment portfolio, and Value stocks represent a foundational element of a smart and balanced portfolio.
Some examples of Value stocks available on the Wombat Instant Account:
Exelon Corp. (EXC)
T-Mobile US, Inc. (TMUS)
Western Digital Corp. (WDC)
Source: www.forbes.com
The bottom line
Value stocks can be an excellent way of adding stability and diversity to your portfolio. They can bring in dividends, and offset the volatility inherent to fast-moving Growth stocks.
Note: Even though Value stocks are less risky than Growth stocks, there is always a risk associated with investing in any company. Be aware, your capital is at risk when you invest.
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