Investing in undervalued stocks
One man’s trash is another man’s treasure, as the popular saying goes. The same can definitely be said for stocks. Investing in undervalued stocks is a win-win situation for you. Either a company’s value drops even further, and you lose next to nothing, or it rises, giving you easy profits. In fact, many companies undervalue their own stock to attract investors in. This goes even for companies that know their product or service is worthwhile. They just need a kick in the right direction. Therefore, there are lots of relatively small companies out there just waiting for someone to invest in them. Once they get the ball rolling, the sky’s the limit with their growth, in many cases. Even if their growth regresses or recorrects at one point, you would have still made a considerable profit.
The opposite situation could have worse results. Sure, a company with a high stock value has a proven track value. Their likely to do well in the future, or sustain their current level at the very least. However, they also have far more room to fall, so the losses investors can make on them could be remarkably high. This is why many such companies are so cautious, better safe than sorry. However, companies that have next to nothing, with undervalued stocks, could have unlimited room to grow.
Undervalued Penny stocks
This is why an investment in penny stocks can be quite attractive to many people, the lowest value stocks you can find. As long as you do not invest too much, you could turn a profit on a low-risk investment. There is a hell of a lot of opportunities out there for this kind of thing. Most of these types of stocks, almost 100%, do fail, however. So, anyone investing in them should do their homework and expect failure. There is a reason many are penny stocks, after all. If you decide to do so, you should also be careful, since this market is highly unregulated and filled with scams. Many are thus not undervalued stocks really, but just low quality. The key is to be able to recognise the diamond in hte rough.
The ideal for all investors is that one should buy low and sell high. Therefore, this would be the ideal situation for any investor to take advantage of.
However, there is an even more extreme version of such trading that exists, when it comes to undervalued stocks. Some investors take this strategy to its extreme, and may even be seen as predatorial. They take advantage of struggling companies through a certain method, and can still not lose all their investment even if the companies fail. This is what people call Distressed Debt Investing.
Distressed Debt Investing
Basically, one can profit from struggling companies by buying up their debt, so not exactly involved in undervalued stocks. They can usually buy said debt at a discount. What happens is that an investor can turn a profit in whatever situation follows. If a company makes profits, so does the investor. If a company does go bankrupt, investors can still get payment after a settlement, so the losses tend to be low. In fact, they could even become the owner of said company in certain situations.
Investors can buy a bond for a company for a significantly reduced value. In such a situation when a company is struggling, such an offer is meant to offset risk. If the company’s prospects are on the up, such an investor can make even higher profits than a regular investment in a company. Namely, by buying a stock directly.
Those who buy up distressed debt are the first a court will pay when it comes to bankruptcy. Therefore, in such a situation, this means a certain investor will receive the company themselves. If they manage to turn the company around, it is quite evident that they can make significant profits.
However, if a company is in such a situation where they are offering such a bond, they are very likely to fail. This is why the people who tend to take advantage of this sort of situation are hedge funds and investors with experience. They have to be able to recognise the risk in investing in such a bond, spread it, and see where the highest possibility for gains are. The average beginner trader can still take advantage of this. There are some mutual funds that get involved in these types of deals on the regular. Some also offer access to such markets through private channels.