Value trap: dangers of ‘cheap’ stocks

Lower price alone does not make a stock a value buy. Look deeper into a company’s fundamentals

Veterans as well as novice stock market investors have been following the practice of value investing for decades. In this strategy, investors put their money in stocks that are considered undervalued as they believe that the stock price does not reflect the actual value of the stock and thus has the potential to move up. But all such stocks are not as undervalued as they seem. The reasons behind the fall in price have to be analysed. “The perpetual problem with value trap is that often it becomes known to investors only after they have bought the stocks. They might have to sell cheap, just like they bought cheap,” said Raamdeo Agrawal, joint managing director, Motilal Oswal Financial Services Ltd.

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