Key Takeaways

  • Value stocks are shares that trade below their intrinsic worth, often identified through financial metrics like price-to-earnings (P/E) and price-to-book (P/B) ratios.
  • They are generally found in mature industries such as finance, energy, and manufacturing, whereas growth stocks dominate sectors like technology and healthcare.
  • Value investing is based on the principle of buying undervalued stocks with the expectation of long-term appreciation.
  • Investors are drawn to value stocks for their potential for capital appreciation, stability, and dividends, though they carry risks such as slower growth.
  • Distinguishing between market value, face value, and intrinsic value is essential for investors to understand how stocks are priced and valued.
  • Diversification between growth and value stocks can strengthen a portfolio’s resilience across market cycles.

Definition of Face Value

Face value, also known as nominal value or par value, is the value of the share at the time of the Initial Public Offering or the value before it was shared among the owners of the company. It refers to the original cost of the stock stated on the security certificate and will not change until the issuer splits the stock.

Where Is Face Value Used?

Face value is an important variable in shares calculations such as:

  • Market values of shares
  • Interest payments
  • Discounts
  • Premiums
  • Yields

How Is Face Value Related to Price?

The face value and market price of shares are not related. However, both prices can rise or fall according to the market forces, fluctuations in interest rates and the financial status of the issuing entity.

What Is a Share?

Share refers to equity ownership in a business entity.

What Are the Types of Share Value?

There are two major types of share value including:

  • Market value
  • Face value or par value

What Are Value Stocks?

Value stocks are shares that appear underpriced when compared to their intrinsic or book value. These stocks often trade at lower price multiples, such as a low price-to-earnings (P/E) ratio or a low price-to-book (P/B) ratio, relative to peers in the same industry. Investors who ask “what are value stocks” are generally looking for equities that the market has overlooked or undervalued but still have solid fundamentals and long-term potential.

Value stocks are commonly associated with established companies that generate steady cash flows and may pay dividends. Unlike growth stocks, which focus on rapid revenue and profit expansion, value stocks are typically more conservative investments favored by those seeking stability and long-term returns.

What Is the Difference Between a Market Value and a Face Value?

The forces of demand and supply determine market value after IPO and changes daily based on the volume of trading. On the other hand, face value is determined before or at the time of IPO and remains constant unless the issuing company announces a stock split.

Market Value vs. Intrinsic Value

While market value reflects the price at which a stock is currently traded, intrinsic value represents the stock’s “true worth” based on fundamentals such as earnings, assets, and cash flow. Investors focused on value stocks aim to buy shares where the market value is significantly below the estimated intrinsic value. This discrepancy creates opportunities for long-term gains once the market corrects the undervaluation

What Is Dividend?

Dividend refers to a corporate action which involves the distribution of profits in cash form to the shareholders of a company. Typically, dividends and dividend payouts are announced and calculated on face value.

What Is Stock Split

A stock split is a corporate action performed by companies to increase the value of their stock. It involves dividing the face value of a stock by a whole number.

What Is an Example of a Face Value Computation?

For example, a company wants to raise capital by offering $1,000,000 in shares. If the face value of each share is $50, the company must issue 20,000 shares to raise its capital. Meanwhile, the company will pay a dividend on each share. The dividend will be calculated as a percentage of the face value. Let's assume the company is paying ten percent dividend. This means each share worth $50 at face value will receive a $5 dividend.

How Can I Diversify My Portfolio?

Diversifying your portfolio requires investing in value and growth stocks. If your holdings currently have only one type, try to diversify it. If you are new to the investment market, ensure your portfolio is balanced between value and growth stocks.

Benefits and Risks of Value Stocks

Value stocks can offer several advantages:

  • Lower valuation multiples: Making them appear as “bargains” compared to overvalued peers.
  • Dividend potential: Many value companies distribute consistent dividends.
  • Stability: These companies often operate in established industries with predictable revenue streams.

However, there are risks:

  • Value traps: A stock may remain undervalued due to poor business prospects.
  • Slower growth: Value stocks typically do not grow as quickly as growth stocks, limiting upside.
  • Market sentiment: It can take years for the market to recognize a company’s intrinsic worth

Is the Stock Price the Same as the Stock Value?

No, stock price and stock values are distinct terms and the two are determined using different methods.

What Are the Indices for Growth and Value Stocks?

The majority of investment firms such as S & P Dow Jones Indices and Wilshire use indexes which splits the stock market into value and growth stocks. This is achieved by using a variety of factors to rank stocks including sales and profit growth, price-earnings ratios, and others.

What Are the Industries Grouped Under the Value and Growth Stock?

Stocks of technology and healthcare companies are categorized under the growth group while energy and financial stocks tend to be in the value class.

Can Growth Stocks Transition to Value Stocks?

Growth stocks can become value stocks when the issuing company transitions from a growing company into an industry giant. Companies such as Apple, Intel, Cisco Systems, and Gilead Sciences became some of the most valued stocks despite modest forecasts while they were being issued as growth stocks.

Characteristics of Growth Stocks

Growth stocks have the following properties:

  • Strong historic and projected forward growth rate
  • Strong return on equity
  • Higher earnings per share

Are Value Stocks Low in Value?

Value stocks are expensive, but they might not be performing well on the stock market. They are usually found on the list of stocks which have lost value for 52 weeks.

Why Do Some Investors Choose Value Stocks?

Investors consider value stocks as good buys because they are undervalued for various reasons by the market and the investor aims to acquire the stocks before the prices go up.

Examples of Value Stocks

Classic examples of value stocks are found in industries such as:

  • Financials: Large banks and insurance companies.
  • Energy: Oil and gas corporations with steady but slow growth.
  • Consumer goods: Established brands with consistent demand.

For instance, companies like Johnson & Johnson or Procter & Gamble are often considered value stocks because of their strong market presence, reliable dividends, and relatively low valuation compared to their long-term earnings potential

Frequently Asked Questions

1. What are value stocks in simple terms?

Value stocks are shares that trade below their intrinsic worth, often in mature industries, and are attractive to investors seeking stability and dividends.

2. How do you identify a value stock?

Investors look for low P/E or P/B ratios, steady earnings, strong balance sheets, and dividends as indicators of undervaluation.

3. Are value stocks safer than growth stocks?

They are generally considered less volatile but may offer slower growth. “Safer” depends on market conditions and the company’s fundamentals.

4. Can growth stocks become value stocks?

Yes. As growth companies mature and their expansion slows, they can transition into value stocks if they begin trading at lower multiples.

5. Why invest in value stocks?

Investors choose them for potential price appreciation, consistent dividends, and portfolio diversification benefits, especially during market downturns.

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