Posted by Trent Accounting

How Stocks Become Undervalued

How Stocks Become Undervalued

What exactly is an undervalued stock? An undervalued stock is a kind of stock which has a selling price which is lesser than what is assumed it will have. For instance, if a stock is being sold at $50 dollars, however, it should be sold at $100 dollars or has a value of $100 dollars then it is known as undervalued stock. 

Quite simply undervalued stock is something which is sold lesser than its intrinsic value. Intrinsic value is the value of a company which is decided without keeping in to consideration its market value. It is also known as the fundamental value. In this article, we will be getting to know more about the stocks and the reason that they are undervalued. There are many reasons as to why the stocks are undervalued some of which we have mentioned below. Read on to find out why are the stocks undervalued.

Why and when are stocks undervalued?

You will find numerous reasons as to why and when are stocks undervalued. Some situation can occur at the same time to make it possible for the stocks to be undervalued. Some of the reasons are:

  • Cyclic behavior

Many of the businesses face different cycles and go through different cycles of low as well as high profits. Sometimes they get a lot of profit and sometimes a bit less. The amount of profit depends upon the time of the year which approaches. For instance, an air conditioning company will earn fewer profits in the winter season as compared to the high profits it will get when it is the summer season.

  • Herd mentality

If people wish to invest in anything, they take a look at the market as well as look at the other investors and look what they are doing. They wish to enter the same race as the investors around them and wish to follow them. 

This procedure is carried forward when the price of a stock decreases or when the market is falling. Investors fear that they will lose everything and so they rush forwards to sell theirs instead of waiting and hoping that the market will risen up. They believe that it is better to sell the stocks at a loss price rather than waiting for the market to get high. 

  • Non- trendy stocks

The stocks which you have under your control have a status which is attached to them. However, a kind of stock which is made up in the industry is what is called the non-trendy stock. For instance, if you give people the option to either invest in the Google or Johnson and Johnson, they will choose Google definitely. This is because not only is Google the best Search engine optimization all around the world, but it is also by far the most popular kind of engines which are used.

  • Quiet stocks

A kind of stock which does not come in the limelight and which is not very well known can easily get undervalued. Such a stock which can easily go unnoticed by the investors can be called as quiet stock. Few examples of quiet stocks include small cap stocks and foreign stocks. 

  • Unglamorous stocks

It is the wish of everyone to invest in something which has a great value and which is currently the best thing ever. Investors think that they can make a big amount of money this way and that they can be millionaires very soon. Some of the companies include Facebook, Apple and Google as they are the most popular all around the world. 

How to find undervalued stocks?

It will take some time for you to find undervalued stocks because you will have to search very deeply through many different companies. In order to find undervalued stocks you will have to go through the financial reports of different companies, their official websites as well as a lot of other important information to make a good decision. 

You will have to compile and collect all the data so that it is easy for you to track and find the results, and then confirm about which one stock do you wish to invest in so that you can be completely organized. 

Trent Accounting