Those who invest strategically achieve the higher profits. Here you will find the most important opportunities and risks of value and dividend strategies.
Those who invest their money strategically on the stock market are ahead of the game. Because a strategy is nothing more than a decision-making tool that prevents expensive mistakes, namely irrational wrong decisions. Two of the most popular strategies among investors are value investing and the dividend strategy. This article shows where the opportunities and risks lie in both strategies.
Systematically buying undervalued stocks: Value Investing
The principle is: buy a value stock when it is systematically undervalued on the stock market (by the way, the English word "value" means nothing other than "worth"). Sooner or later, the stock market price of such a share will rise. The value strategy has made Warren Buffett one of the richest men in the world.
But what does "undervalued" mean? Benjamin Graham, Buffett's teacher and the founder of the value strategy, assumed that every stock has a fair, intrinsic value. In other words, a value that adequately reflects the future earnings prospects of the company in question.
The trick now is to buy a stock when its price is well below this intrinsic value. This often happens on the stock markets: Shareholders neglect some stocks, for example because other stocks are in fashion at the moment or because they have not yet discovered certain "pearls".
But how can such undervaluation be detected? Quite simply - by using key figures. Typical ratios that value investors with how long does exness withdrawal take look at are the following.
Price-earnings ratio
The price-earnings ratio, or P/E ratio for short, is calculated by dividing the share price by the earnings per share. It is a characteristic value to judge a stock. A rule of thumb says: the lower the P/E ratio, the more favorable the share and therefore the more likely it is to be undervalued. Put simply, the P/E ratio expresses the number of years an investor has to wait before a stock investment will be worthwhile - assuming that earnings do not fluctuate.
For example, let's say you're interested in German automotive stocks. The 2014 P/E ratio of Daimler shares is just under ten, that of BMW common shares is just over nine, and that of Volkswagen common shares is between seven and eight. Therefore, when looking at the P/E ratio, Volkswagen is currently the cheapest.
Note: Many value investors only buy stocks with a P/E ratio below ten. But it only makes sense to weigh up the ratios of stocks in one sector against each other and not to compare an automotive stock like Daimler with an insurance stock like Allianz or the security of a food company like Nestlé.