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A Professional Guide for Value Investing

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rohit ch
A Professional Guide for Value Investing

Benjamin Graham developed the theory of value investing. The main agenda of value investing is to purchase stock at an undervalued price and then sell it when the price reaches its intrinsic value or higher than the intrinsic value. Intrinsic value is the actual value of a share. It is a long term and proven strategy. 

 

Value investing is an art of picking the value stocks which are trading at less value than their intrinsic value.

Some Value Investing Terminologies

When it comes to value investing, one should know all the essential terminologies that are used in value investing. Here are some of them.

 

Intrinsic Value

Intrinsic value is the real worth of stock. Sometimes it is also known as a fundamental value. Intrinsic value is calculated by valuation methodologies like the dividend discount model, discounted cash flow analysis, etc. 

 

Value of stocks depends upon numerous fundamental factors such as the strength of a brand, financial performance,  executive team, product momentum, etc. and various irrelevant factors like geopolitics and macroeconomics, which are outside the control of a company. Intrinsic value tries to eliminate these factors and mainly focus on fundamentals. 

 

Discounted Cash Flow (DCF)

Discounted cash flow is an estimation process which is used to calculate the current value of a stock based on its future cash flow. 

 

Discounted Cash Flow = CF1 / (1+dr)1  +  CF2/ (1+dr)2  +…..+ CFn/ (1+dr)n 

 

CF = Total cash flow for the given year

dr = Discount Rate

Margin of safety

The difference between the intrinsic value of a stock and the market price is the margin of safety. As an investor, a higher margin of safety is better for you as it protects you against any poorly-made decision or potential market downturn.

 

Dividend Discount Model (DDM)

The Dividend Discount Model (DDM) is a quantitative method of valuing a company’s stock price based on the presumption that the current price of a stock is equivalent to the sum of all of the company’s future dividends discounted from their present value.

 

Value of Stock= EDPS/(CCE−DGR)

 

EDPS = Expected Dividend Per Share

CCE = Cost of Capital Equity

DGR = Dividend Growth Rate

Advantages of Value Investing

  • Value investing is the best path to stock market profit.
  • Lesser risk and volatility and high rewards.
  • Makes the most of compounding.
  • Good stocks at lower rates.

 

Disadvantages of Value Investing

  • Identifying the right entry point is difficult.
  • It requires ample time and efforts to research and analysis.
  • Requires emotional discipline.
  • The wrong analysis may lead to a massive loss of capital. 
  • The value may take longer to realise or may not be realised at all.

 

In The End

Value investing is an excellent possibility of making high returns with negligible risk. To become successful in value investing, you have to do great research and analysis continuously. Value investors are always in search of undervalued stocks. There are various tools and methods that investors use, along with a trustworthy broker such as Tradeatf which provides excellent services to its clients. 

 

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