Undervalued Stocks

Meaning of Undervalued Stocks

Undervalued stocks are those stocks that are currently priced lower than their true, fair, or intrinsic value based on several reasons like panic selling, bad news, market mood, etc. This usually occurs when the prevailing market price of any share does not represent its actual earnings, assets, and growth opportunity.

Benefits of Investing in Undervalued Stocks

The following are the main advantages of investing in undervalued stocks in India:

• High Returns: As these stocks trade below their actual intrinsic value, they have the potential to generate high returns as their share prices converge with their true value. Therefore, investing in undervalued stocks provides an opportunity to earn profit.
• Cheap Buying: As the stocks are undervalued, there is no risk of overpaying when purchasing them. Hence, it provides a margin of safety and reduces the risk associated with investing.
• Less Volatile: Undervalued stocks are already trading at a discount; therefore, they are not affected by market fluctuations much. 
• Dividends: Even though the stocks are undervalued, the underlying business continues to earn stable profits and pay regular dividends, which can be a passive source of income for investors.
• Patience: Investing in undervalued stocks requires lots of patience and discipline as the prices increase over a while.

Disadvantages of Investing in Undervalued Stocks

The various disadvantages to investing in undervalued stocks are mentioned below:

• False Signals: It is not necessary that every undervalued stock can recover and regain its value. There might be some cases when the stock might look undervalued, but it might be due to the inefficient business model, poor financial performance, etc. If these are the reasons behind undervaluation, then it might never regain its original value.
• Short-Term Gains: Traders looking for short-term gains should avoid undervalued stocks as these stocks tend to perform in the long run.

How to Invest in Undervalued Stocks in India?

To invest in undervalued stocks in India, one can follow the below-mentioned steps:

1. Identify the Stock: The first step is to identify the undervalued stock. Fundamental analysis helps an investor in identifying undervalued stock.
2. Demat Account: To invest in undervalued stock, one is required to have a demat and trading account. Pocketful also offers you an opportunity to open a free demat account so that you can easily invest in undervalued stocks using their advanced trading platform.
3. Funding: Once the Demat account is opened successfully, you can easily transfer funds to your trading account to purchase the stock. Nowadays, there are various online options through which one can transfer funds, such as UPI, RTGS, and NEFT.
4. Investing: You can place a buy order for the selected undervalued stock. The order can be placed using the trading application provided by your broker.
5. Reviewing: As the stock is purchased, an investor is required to continuously monitor its performance to realize the profit accordingly. It is advisable to place a proper stop-loss to reduce the potential loss.

Conclusion

On a concluding note, investing in undervalued stocks can help an investor in creating wealth in the long run. However, finding such an opportunity is rare, and not every undervalued stock has growth potential. Therefore, investors are required to conduct a thorough fundamental analysis. Along with this, it is necessary to consult your investment advisor before making any investment decision.