Value Stock
A value stock is a share that trades at a low price relative to measures such as earnings, book value or cash flow.
Value stocks look inexpensive compared with the company's fundamentals. They usually have a lower price-to-earnings ratio, price-to-book ratio or price-to-sales ratio than the market average. Value investors buy them in the belief that the market has underestimated the company and that the price will move closer to its true worth over time.
Companies can trade at low valuations for many reasons. They might be in slow-growing or out-of-favor industries, have had a temporary setback, or simply attract less attention. Many value stocks are mature businesses that pay solid dividends.
The main risk is a so-called value trap: a stock that looks cheap but is cheap for a good reason, such as a declining business, and keeps falling. Careful analysis of the balance sheet, cash flow and competitive position helps tell the difference.
Value investing is often linked to Benjamin Graham and his followers, who emphasized a margin of safety between price and estimated intrinsic value.
Example: a bank trading at a P/E of 8 and below its book value, while the market trades at a much higher P/E, would typically be classed as a value stock.