Value investing involves selecting undervalued stocks that are believed to eventually trade at a higher value. Equity funds, overseen by portfolio managers, can be tailored to include only small, mid, or large cap value investments.
Stocks represent a large umbrella in the financial markets in which categories, subcategories, and investment styles are assigned. One such equity investing style is value investing, a strategy successfully used by business magnate and billionaire Warren Buffett in the early 21st century. Simply put, value investing is about selecting companies where the stock price does not reflect what an investor believes to be the company’s true value, or a stock that is undervalued. An equity fund includes a mutual fund that uses this style of investment.
A wealth fund may be overseen by one or more portfolio managers. Investors put a certain amount of money into the fund, and those assets are invested by the fund’s managers. The value of the fund grows or decreases depending on the buying and selling decisions made by professionals. In a stock value fund, these managers agree to look for opportunities that fit with a value investing strategy—in other words, stocks that present a long-term buying opportunity to investors. Investors can learn a fund’s investment style by reading that fund’s prospectus or filing with a financial regulatory agency.
The basis for value investing is selecting stocks that are not appreciated by investors. Value investors select stocks because stock prices do not reflect the true value of the company. A value investor believes that the stock will eventually trade at a higher value, and by buying the stock when it is undervalued, short- or long-term gains can be made.
One of the criteria for value investing is understanding the industry in which undervalued stocks are traded. This knowledge allows an investor to justify why the equity investment is worth more than the share price indicates, and that is why investing in an equity value fund can help generate returns. Professional money managers often have experience in particular sectors and, at the very least, have access to a research team to help them discover stocks of value.
An equity fund may be limited beyond value investing. Some mutual funds hunt not just value stocks, but also value stocks of a particular size, or market capitalization, which is a measure of a company’s value based on the number of shares available for trading and the price of the stock. An equity fund could be tailored to include only small, mid, or large cap value investments.
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