Value investing is the term used for a strategy based on holding stock for a longer period of time rather than participating in short term speculation.
The main principle in value investing is to find stocks which will appreciate in value to provide a good return over time. This can either mean a company which you feel is currently undervalued or one where you feel the company is likely to grow in the future. This potential for growth is referred to as the value in the stock by investors.
When selecting the stocks you would like to invest in it pays to take the time to fully understand the company itself as well as the share price. If you understand the products or services a company provides and the markets it operates in then not only will you have a better idea of whether to buy, but you will also be more likely to know how events may affect the price once you hold the stock.
Before buying a particular stock you should be clear about why you think there is value in the stock. Ideally you will be able to quantify this in terms of share price before committing to a purchase. The value should be greater than the sum of the share price, the spread and all dealing costs if you are going to make a purchase.
If you are unsure about a stock it can be worth waiting a short while to ensure your predictions are starting to come true. While this can mean you pay a slightly higher price if you do eventually buy, it can also save you the loss if the predictions are not correct.
When you find the stock you are going to purchase it is a good idea to set yourself a minimum and maximum price that you are comfortable with the stock reaching. The minimum price is so that if you have picked a company whose fortunes suffer you can minimise the loss you are going to experience. The maximum is so that you can take the profits if prices rise before anything else happens. As you are holding these stocks for a while these limits will need revising from time to time to ensure you are not caught out.
Value investing is popular with large institutional investors and pension funds do you will have competition to find opportunities; however, the returns can make the hard work worthwhile if you get it right. One extra benefit of holding stocks for the long term is that many companies pay dividends each year as a share of the profits. These can be used to make further investments so that your portfolio grows even more over time. Before reinvesting all the money make sure you have made provision for any tax due as this will be counted as income for the year.