Value investing looks for shares that trade below what the underlying business is worth, often because the company is out of favour, boring or going through a temporary problem. The idea is that the price will move towards the value over time.
How value investors work
They estimate the company's worth - from its earnings, cash flows or assets - and only buy with a margin of safety, a clear discount to that estimate. Low P/E, P/B or EV/EBITDA ratios are a starting point for finding candidates.
The value trap
Some shares are cheap for good reasons: a shrinking market, too much debt or a business model that no longer works. Checking cash flow, debt and the direction of revenue helps tell a bargain from a trap.
This content is general information, not investment advice.