Axis Money IQ Knowledge Nugget - 202

The Value Factor: A Guide to Smart Investing

In the world of personal finance, value factor investing stands out as a strategy that has proven its worth over time. This approach focuses on buying undervalued stocks or companies priced below their true value and then holding them until the market eventually recognizes their potential. In this blog, we will delve into what value factor investing is, why this method is special, and how investors like you can use it to create a solid investment portfolio.

Let us understand Value Factor Investing

Value factor investing or simply value investing is about finding stocks that seem undervalued or say “affordable” based on specific financial metrics and ratios, such as price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, price-to-sales (P/S) ratio, and dividend yield. The main goal is simple. You identify companies whose stock prices do not reflect their true worth like finding a Rs. 100 note for Rs. 70. This can present a chance for potential growth as the market adjusts and realizes the undervalued bargain stock’s right market value. 

Key Metrics in Value Factor Investing:

1.    Price-to-Earnings (P/E) Ratio: This ratio compares the current market price of the company to its earnings per share. A company with lower PE ratio may indicate that it is undervalued compared to its true earning potential. Remember to check PE ratios of competitors too.

2.    Price-to-Book (P/B) Ratio:

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