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Trends & Analysis
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Gold prices ease after hitting record high

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Week Ahead Preview: 17th of February

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Europe stocks hit record high on strong earnings

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BRIC currencies mostly gain as US inflation rises

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Refresh your portfolio with Coca-Cola?

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GBP/USD price may rally to multi-week high

Trends & Analysis
News

Gold prices ease after hitting record high

News

Week Ahead Preview: 17th of February

News

Europe stocks hit record high on strong earnings

News

BRIC currencies mostly gain as US inflation rises

News

Refresh your portfolio with Coca-Cola?

News

GBP/USD price may rally to multi-week high

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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