When it comes to Stock Market investing and valuing stocks, you need to have an idea of what types of things can cause stocks to become undervalued. Understanding these reasons can help you capitalize when a stock is undervalued and ripe for investing. Big gains can be made if you’re paying attention and understand why stocks lose value.
I’m not talking about timing The Market. Never try to time The Market. It’s like gambling. You may consider yourself lucky and get a few wins, but The House always wins in the end. Instead, understand the reasons stocks become undervalued and use that understanding to make sound financial decisions.
Let’s take a look at why stocks become undervalued…
1. Bad News
One of the biggest reasons on the list is the awareness of bad news. Every company will experience some bad news here and there, even the good ones. They could have lawsuits against them, a weaker quarter where profits are down, or purchase a company that isn’t quite working out. It doesn’t mean it’s a bad company or bad stock. It could mean it’s just a bad time. And a bad time for a good company can be a good time to pick up their stock at a cheaper price.
2. Market Crash
If The Market keeps going up and up and up to unheard of highs, it’s likely there will be a crash soon. This is referred to as a bubble. You know how you blow a bubble and it inflates to a bigger, more likely to burst bubble? Same thing for the Stock Market. When that high seems too much to sustain, investors will get nervous, panic, and sell lots of stock. This huge selloff will result in a crash. Ever heard of the Dotcom Bubble? Again, just because a crash happens doesn’t mean the company whose stock you like is not good. It just means you have an opportunity to buy it on sale.
3. Follow The Herd Mentality
Sometimes people make financial decisions just because that is what everyone else is doing. If The Market is declining and things look down, everyone starts to sell out of fear of losing everything. They want to save what they have. Or if The Market is on the rise, they buy because they feel like they need to get in on the uptick and get the most gains possible. This is what the herd does. They do what everyone else is doing. This results in lots of stock being sold for less then their worth and bought for more than their worth.
Some company’s stocks are better during specific times and worse during others. Their stock is based on cycles. It could be the season, time of the year, or overall general consumer mood during specific times. For example, I would expect the stock to be higher for a beach-based restaurant in the summer than in the winter. Or stores that primarily carry school supplies to have a higher stock value when school is about to start rather than end. This doesn’t mean the company is any less valuable. It’s just that time of the year.
5. Not So Glamorous Stocks
There are many stocks out there that are undervalued simply because they’re not so glamorous. What sounds more exciting to you? Owning stock in Amazon or Facebook, or owning stock in General Electric, Johnson Controls, or Honeywell? Just because these stocks aren’t as glamorous doesn’t mean they aren’t as valuable. However, The Market tends to undervalue these stocks because they’re not as flashy or in the news.
There are many reasons why a stock can be undervalued and understanding those reasons can make a difference between making a good investment or making a bad one. Simply being cheap doesn’t mean a stock is undervalued. There’s lots more to it than that. Understand these five reasons stocks tend to be undervalued and use them to make sound financial investment decisions. No matter what The Market does, know that time in The Market beats timing The Market most times. Study stocks, understand the value of the companies, and then look for stocks to become undervalued so you can by them on sale.
***As I have mentioned many times…I am NOT a financial advisor. The information here is provided for some general financial education and for entertainment purposes. Follow up with a certified financial advisor to learn more and receive financial guidance.