A value stock is one whose price appears low despite the company's seemingly strong financial performance, as measured by such fundamentals as the company's revenue, earnings and profit margins. Investors in value stocks are assuming that the price of the stock will eventually rise, reflecting the true health and potential of the company. Because they see the stock as relatively undervalued, they're anticipating that its growth will outpace the growth of the value stock's competitors or the market overall.
Some of the key characteristics of a value stock are:
- Price-to-earnings ratio at or lower than the broader market
- Priced below peers in its industry
- Generally less volatile than the broader market
- More likely to pay dividends
Value stocks tend to be stocks of established companies with proven histories of financial performance — differentiating them from "growth stocks," which tend to be priced higher and are often issued by newer companies without long track records. Since value stocks can take longer than growth stocks to increase in value, investing in them may be better suited to longer-term investors who have the time — and the patience — to wait. Value stocks also are more likely to issue dividends to their investors than growth stocks are.
"When investing long term, some people combine growth and value stocks to get the potential for high returns with less volatility."
— Nick Giorgi, Investment Strategist in the Chief Investment Office at Bank of America Merrill Lynch
Investing in both
value and growth stocks can be beneficial to your portfolio. "When investing long term, some people combine growth and value stocks to get the potential for high returns with less volatility," says Nick Giorgi, Investment Strategist in the Chief Investment Office at Bank of America Merrill Lynch. Because economies tend to run in cycles — sometimes exhibiting characteristics that favor value stocks, other times exhibiting characteristics that favor growth stocks — this blended approach may help investors pursue more consistent returns over time, says Giorgi.