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Value Stocks
Value stocks typically have a lower price-to-earnings (P/E) ratio, lower price-to-book ratio, and pay more dividends than other stocks. The idea behind a value stock is that the stock is undervalued by the market. History shows that when you buy stocks that are priced cheaply relative to other stocks, your returns usually benefit over time. Suppose you're looking at a stock that typically trades in a Price-to-Earnings (P/E) range between 20 and 30. If you buy it at 20 and let it move up to 29 before you sell, you clearly see a better value than if you buy at 27, let it move up to 30 and then sell. Even if you ignore short-term cycles and hold it for the long term, you're better off if you buy the stock as cheaply as possible in the first place. The risk is that the company that you bought has problems that justify its low valuation. What if the stock stays at a P/E of 20 and holds your money hostage? However, if you choose companies that are in good financial shape and there's an explanation for why their stock is selling cheap, chances are the shares will resume their growth eventually. |
