Value investing: Definition, how it works, strategies, and risks

Value investing: Definition, how it works, strategies, and risks

17 January 2024 | By INDIE

When investing in the stock market, you will come across numerous strategies used by different investors to meet their financial goals and earn high returns. One such strategy is value investing. Well-known investors including legendary investor Warren Buffett use this strategy. But what is value investing? 

Value investing meaning

Value investing is a strategy based on discovering stocks that appear to be undervalued but have strong fundamentals and potential for generating returns over the long run. A value investing strategy includes the process of determining the inherent worth of a company, investing periodically in it, and patiently waiting for the market to show its actual value. 

Value investing includes careful evaluation of distinct financial metrics as well as market indicators. Dividends, earnings, management quality, and debt level are all parameters considered by retail investors to find value stocks or stocks thought to be cheaper than their actual growth potential and performance. The goal is to buy such companies’ stocks at a lower value than their real worth and hold them till the market corrects the undervaluation. 

Value investing strategies

Financial strength

A careful examination of balance sheets, income statements, and cash flow statements can uncover organisations with strong financial health that the market frequently overlooks.

Look for companies with low price-to-earnings (P/E) ratios.

A stock with a low P/E ratio may be undervalued. To uncover bargains, you must frequently compare a company's P/E ratio to that of its competitors and the industry average.

Excessive dividend yield

High dividend-yielding stocks may be an indicator of undervaluation and are a mainstay in value investing portfolios.

The ratio of debt to equity

Look for enterprises with low debt-to-equity ratios, as much debt can stifle growth and lead to financial insecurity.

Safety margin

Investing in equities with a significant margin of safety, defined as a difference between the stock's price and its estimated intrinsic value, might help to mitigate future losses.

Analysis by industry

Consider sectors that are now unpopular yet have promising long-term potential.

Management quality

Look for organisations that have a track record of competent and trustworthy management.

Risks in value investing

Missed opportunities

By focusing primarily on inexpensive stocks, you may overlook growth stocks with significant potential returns.

Market volatility

The stock market is known for its high volatility. Value stocks may remain inexpensive for extended periods, putting your patience to the test.

Value traps

Some stocks may appear undervalued but are rightly priced due to underlying concerns in the company or sector.

How can you reduce the risk of value investing?


Spreading investments across several industries and equities can help reduce risk.

Regular portfolio evaluation

It is critical to constantly analyse and adapt your investment portfolio in reaction to market fluctuations.

Long-term outlook

To weather market volatility and achieve returns, value investing frequently necessitates a long-term view.

How do I start investing in stocks?

If you’re wondering, How do I start investing in stocks, here’s a handy guide. 

A solid educational foundation

Learn the fundamentals of the stock market and financial principles.


Use financial news, corporate reports, and market research as resources.

Account for brokerage services

Open a trading and demat account with a reputed platform like IndusInd Bank’s INDIE. You can invest seamlessly in the stock market and a range of other securities through INDIE in a low-cost and convenient manner.

Begin small

Begin with a low investment amount and progressively raise your exposure as you acquire confidence and better knowledge.

Wrapping up

Value investing is a strategic technique that demands perseverance, in-depth investigation, and a sharp eye for undervalued opportunities. It is a voyage of discovering the market's rhythm and the fundamental value of enterprises. The value investing motto stays constant: invest properly, not broadly, and the value will ultimately manifest itself.

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.