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Trends & Analysis
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Gold loses some shine after hitting record highs

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Week Ahead Preview: 22nd of April

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P&G shares rise despite Q3 sales miss

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Trends & Analysis
News

Gold loses some shine after hitting record highs

News

Avoid the tech wreck with PayPal?

News

Week Ahead Preview: 22nd of April

News

P&G shares rise despite Q3 sales miss

News

Gold continues to shine amid geopolitical worries

News

Crude oil dips for 3rd session after supply data

Undervaluation definition

Undervaluation is the concept used in fundamental analysis and related disciplines such as value investing to indicate an asset with an artificially low price. In these systems, the assumption is that eventually these assets will readjust to find the ‘correct’ price, and so traders who find an undervalued asset can make a strong long-term investment. Traders may identify undervalued assets in the stock and forex markets.

 

How is valuation measured

Undervaluation contradicts the ‘efficient market hypothesis’, a claim mainly used in academic finance that states the market has always priced in all available information, so unless there is a change in external conditions, nothing can be under- or overvalued. This hypothesis is rejected by most traders, who search for market inefficiencies either by identifying psychology-driven patterns (technical analysis) or differences in valuation (fundamental analysis).

 

Fundamental analysts can use several methods to identify undervalued stocks, currencies, or other assets.

 

In the equity market, metrics such as the price / earnings ratio allow an easy comparison as to the relative expensiveness of each stock. Of course, different sectors will have different standard multiples, and at different times during the business cycle the normal level may change. But a stock which is undervalued compared to its peers, and which doesn’t have an obvious reason to be, may be undervalued. Similar calculations can be performed on forex or commodity prices, although here there is not such a wealth of public information to choose from.

 

Trading undervalued assets

The assumption of fundamental traders is that although an asset may be undervalued for a while, it will eventually return to the level of its peers. This means that value investing is normally appropriate on medium to longer term timescales, and does not attempt to predict minor price fluctuations. Accordingly, this sort of trading is more common for buy-and-hold strategies than quick, technical trading.

 

Start trading with ADSS

ADSS offers a range of global markets for traders, with opportunities in indices, commodities, forex, equities and more. We also feature tutorials, how-to guides, and weekly webinars to help you navigate the financial markets and find better trading opportunities. You can start trading and investing online by opening a live trading or demo trading account.

 

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