A reliable way to make money by investing in the stock market is to search for undervalued stocks. Investors make money by way of stock dividends and by way of capital appreciation. Both means of making a profit in the stock market are improved by a success search for undervalued stocks. Long term profits come from low priced stocks with high intrinsic stock value, a healthy margin of safety, a viable product line, and, often times, value that is hidden unless one takes a second look.
Intrinsic Stock Value
In your search for undervalued stocks look for intrinsic stock value and compare it the current stock price. What is intrinsic stock value? It is the forward looking earnings of a company discounted to current value. A company with a strong patent portfolio may be able to control its market segment for years. The expected cash flow from this market dominance can be translated into future earnings. The value of these future earnings can be and should be added to the current stock price. If you find a stock that is valued according to current earnings when future earnings are likely to soar your search for undervalued stocks will pay off. Buy the stock and enjoy both stock price appreciation as earnings grow and, very likely, dividends that increase along the way.
Margin of Safety
Finding the margin of safety of a stock is fairly basic. When a company has money in the bank, owns all of its hard assets without debt, and has valuable unused assets it is very likely worth more than its current stock price. This is because the company has a margin of safety that will see it through tough economic times. However, be careful in this regard in that sometimes old companies are badly managed and are not taking advantage of large patent portfolios or various hard assets. The stock in question will become more valuable when management, typically new management, finds creative ways to generate income from these assets.
Dividend stocks provide investors with steady income along with appreciation of stock price. Stocks that pay a healthy dividend may become excellent bargains when interest rates fall as investors will price the stock just as they might price a bond that pays a healthy rate of interest. The price will go up as rates fall. Look for companies that pay dividends years after year when you search for undervalued stocks.
How Does the Company Make Its Money?
This may sound like a silly question. But understanding more about the companies that you invest in is never a bad idea. Unused assets can be turned into profitable assets or sold off. Unexploited market niches may become profitable. If you want to make money by investing think outside of the box to find hidden value in a company. Investors are well served by routinely reviewing their own stock portfolio as well in order to purchase more stock if the search warrants. Your search for undervalued stocks may well pay off in a long term very lucrative winner.