Value Stock Investing - How To Buy Top Stocks - Buy Stocks After Analysis

The stock markets have plunged to new lows. Many investors are looking at alternative investments. Experts advise that it is time to buy stocks with Intrinsic value, better termed as Value stocks. Stocks of some big companies are available at throw-away prices. Let's try understanding how to buy stocks and the strategy known as "Value Investing".

What Does Value Investing Mean?
The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.

Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.

The underlying premise is the belief that the market overreacts to rumours, news and events. It is believed that the resultant stock price movement is not in sync with the company's long-term fundamentals. So, value investors can pick these beaten and overlooked stocks and profit when its price reaches its true value.

Value Stocks To Buy In 2009
Good value stocks in Indian stock market

What is intrinsic value?
The actual value of a security , as opposed to its market price or book value can be called its intrinsic value. The intrinsic value takes into account other factors like growth potential, brand image and so on. Some value investors rely on fundamental analysis that takes into account both qualitative and quantitative (ratios, financial statement analysis etc) aspects of the business.

Benjamin Graham and Warren Buffett's thoughts on value investing
High profile proponents of value investing, including Berkshire Hathaway chairman Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value. The discount of the market price to the intrinsic value is what Benjamin Graham called the "margin of safety". The intrinsic value is the discounted value of all future distributions.

However, the future distributions and the appropriate discount rate can only be assumptions. Warren Buffett has taken the value investing concept even further as his thinking has evolved to where for the last 25 years or so his focus has been on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price.

Why should value investors be cautious?
Ever considered the possibility of ending up with stocks that never go up irrespective of numerous up and down cycles? Value investing is picking up stocks contrary to what the other investors are currently interested in. If your computation of intrinsic value of a stock is wrong, you could end up with worthless stocks that won't budge.

Value investors must play safe and be conservative, rather than reckless. Before you pump in your money, do a through research of the company and its business reports. Do not bet on small, unknown firms. Known companies with a good track record are safer to stick to. Do not pay more than its worth. Buy when the price is right. Believe in your research and analysis and do not sway to rumours.

Read: Top 10 most valuable companies listed in BT 500

Further, value investors must know their threshold for risk. People with lower risk appetite must simply keep away from the stock markets in these unfavorable conditions. Do not venture into sectors and businesses you aren't familiar with.
Read Value Investing on wikipedia