Avoid Value Traps in Stocks

Value investing is buying stocks that are perceived as being worth more than what you pay for them.[1] Stocks are valued most commonly by the net tangible assets of the companies they represent, earnings per share, and dividends they pay. Thus, a value investor would favor those stocks that have low price/book ratio, low price/earnings ratio, and high dividend yield.

However, it would be dangerous to go out and buy any stock that meet these criteria, as a stock that appears cheap may in fact be on the brink of bankruptcy and not a bargain at all, despite the figures. Sorting out between the true bargains and the false bargains, or value traps, is not easy. Here are some things to look for that may help you to make the distinction with caution.

Source: wikiHow

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