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The value style of investing looks at whether the price of a company’s stock seems low in comparison to its intrinsic value. A company’s intrinsic value is what it would be worth if it were sold.
Value investors try to find out-of-favor stocks whose share price seems low. A company’s value is determined by factors such as:
- Price/Earnings (P/E) ratio
- Assets as compared to its liabilities
- Cash flow
- Rate of earnings growth
- Dividend pay-outs
When more investors are selling a stock rather than buying it, the price per share goes down. Even though a stock may seem like a bargain, there may be many reasons why people are selling and not buying it. To find out, it is helpful to look online at the company’s quarterly and annual reports. They are available on the Securities and Exchange Commission’s EDGAR database located at www.sec.gov.
Value investors typically invest in companies in a troubled industry. The value investor hopes that the troubles with a particular company are temporary in nature or a product of economic conditions, such as high oil prices.
The growth style of investing focuses on companies that might grow in stature and profitability each year. Even if earnings grow each year, however, growth stocks usually pay little or no dividends. Earnings are reinvested to accelerate future growth.
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