Value stocks are those stocks that have a set of financial parameters that make them look undervalued to their true or fair value. Their market price in the exchange is basically lower than it should ideally be.
Some parameters that are common in value stocks include a low Price/Earnings or P/E ratio, Price to Book ratio of less than one, Market Price less than the historical mean market price.
These might sound daunting to the barakanoob, but are astoundingly simple to understand. Here’s how.
- P/E ratio: The price to earnings ratio is very simply, a measure that compares the price paid by you for the stock in the market with the earnings of that stock in the market. It measures the multiple of earnings that you are paying for the stock when you purchase a share. This is basically calculated by dividing the price per share by the earnings per share of the company, which is an accounting measure.
The lower this ratio is, the more valuable it is perceived to be. Some companies have a very low P/E, such as Intel, whose P/E is arond 15, while Tesla’s P/E fluctuates between 1600 at current price levels.
Growth stocks, on the contrary, are characterised by a high P/E ratio, a low Price to book ratio and current market prices that are above the historical mean market price of the stock.