Reviewed by Sep 30, 2020| Updated on
A financial instrument or security is said to be undervalued when its selling price is lower than that of its inherent value. Undervalued security can be analysed by evaluating the financial statements of the underlying company and other financial aspects, such as the company's cash flow, profits, return on assets and management of its capital. This will also help in determining the stock's inherent or intrinsic value.
Buying undervalued stocks and securities is one of the key investment strategies for value strategies. Investors actively pick out stocks that are undervalued in the market.
However, this strategy of investment is not completely foolproof per se. This is because there is no guarantee to whether the undervalued stock's value will appreciate in the future. Also, determining whether the value of the stock will overcome its current value all depends on the experienced investors' guess.
Investors actively ferret out securities/stocks that are priced lower than its intrinsic value due to the performance indicators utilised in the market's valuation model. Value investors who predominantly concentrate on undervalued stocks acquire them in a move to make a good profit from the low initial cost.
The approach of investing in undervalued securities in the stock market with the hope for earning a profit from the low investment cost is called value investing. Investors pick out stocks that are valued less than their intrinsic value due to the stock market method of valuation in the case of value investing.
Security can be considered undervalued depending on the investor's interpretation. On the other hand, stock can be deemed overvalued if it is priced over its intrinsic value.