Glossary
Value Stock
An informal label for a company trading at a low price relative to measures such as earnings or book value.
Value describes the price rather than the company. A share is called a value stock when it is cheap against something measurable: earnings, assets, or cash flow. Low price-to-earnings ratios and dividends are common features, and neither is part of a definition.
The reason value is treated as a school of thought rather than a screen is that a low price always has a reason attached. Investors who favor value argue that the market regularly overreacts to bad news and prices in permanent decline that turns out to be temporary. The counter-argument is that a low price often reflects a business that really is deteriorating, and that separating the two requires understanding the company rather than the ratio.
Value and growth are the two ends of the same descriptive axis, and both are labels applied from outside. Companies move between them as prices and expectations change, without doing anything different themselves.
Related terms
- Growth StockAn informal label for a company whose revenue and earnings are expected to expand faster than the market average.
- P/E Ratio (Price-to-Earnings)The share price divided by earnings per share: how many years of current profit you are paying for at today's price.
- DividendA cash payment a company makes to its shareholders out of profits, most often once a quarter.
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