When buying stocks, it’s important that you buy those that will make you profits.
Your plan is not to buy a stock that will sit there in place or lower in price after you’ve got your shares.
That happens many times, and it’s not a good feeling if you didn’t know that.
This is where knowing how to look for undervalued stocks to buy comes into play.
Why would you want to buy undervalued stocks?
We all know that the value of something is what makes it important to us. If something does not have a good value, no one would be interested in it.
However, when buying stocks we’re not looking for the “over-valued” ones. The lower is the value the better it is for us.
We would want our stocks to be under-valued because we want them to improve in value while we’re on board.
How would you define an under-valued stock?
According to The Free Dictionary by Farflex,
A stock price perceived to be too low or cheap, as indicated by a particular valuation model. For instance, some might consider a particular company’s stock price cheap if the company’s price-earnings ratio is much lower than the industry average.
That’s a very clear definition, it even has more information than I expected.
How to find undervalued stocks to buy?
Now that you have a clear definition of this topic, you should also know how to find them.
There are some basics you have to know in order to find undervalued stocks.
The very first one is to know about price-earnings ratio (P/E). It’s a ratio used to valued companies.
Therefore, knowing a company’s P/E ratio will also enables you to know this company’s value.
How to find a company’s P/E ratio?
Many stock’s quotes would provide you with this information. Many of them may not be this helpful to you.
This is where your knowledge of P/E ratio’s calculation comes into play. It’s pretty simple if you know the formula.
When calculate a company’s P/E ratio you simply divide the company share price by the earnings per share of the stock.
The result you would get from this calculation is what we called the price-earnings ratio or P/E.
How would you know whether or not the P/E ratio is a good signal for you?
They way it works is by comparing the P/E ratio of different companies that are in the same industry.
A higher P/E ratio indicates that the company is not a good fit for you. Its stock cost more and it’s not making enough profits.
On the other hand, a low P/E ratio is what you should be looking for. This is where the money is and this is what we also called an under-valued stock.
It’s always a good strategy to try to find under-valued stocks to buy because you’d always have more chance to gain from them than the others.
Another technique to find undervalued stocks to buy is to use screeners
Investopedia defines a stock screener as “a tool that investors and traders can use to filter stocks based on user-defined metrics.”
Although stock screeners are very helpful to conduct research, they do have their limit, which is why the P/E ratio may be more helpful.
However, you can choose to use either one of them to find stocks that are undervalued to buy.
The majority of buyers are usually looking to save when they’re buying something. Some of them would never buy anything if it’s not on sale. In fact, I have a friend who’s just like that.
Us as stocks traders should possess this exact same mentality when buying stocks. Specially if you’re trading penny stocks since they’re the most unpredictable.
For this reason, you have to look for stocks that are trading for less than what they’re really worth. When you buy those stocks you have a far greater chance to make profits.