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Definition

Where the market price of a security is below its "real" value. Whether a share is under-priced or not is always a perception. Clearly, at any price that the market reaches there is both a buyer and seller - which means that at least some investors believe that the share is underpriced while others believe it to be overpriced. When you buy a share, you do so because you think it will go up, but the person who sells it to you has exactly the opposite viewpoint - that is why he is selling it. Only one of you can be right, and whoever is right will take money away from whoever is wrong. Markets typically oscillate from being underpriced to being overpriced and back again - but this is relative to investors' perceptions of the share's real value. The real value of a share is difficult to establish with any precision because it depends on a discounted flow of future dividends to accrue to that share - and that, in turn, depends on a forecast which must be subjective. Despite this, your objective as a private investor is to find and buy shares when they are underpriced in relation to their risk - so you need to develop a way to assess that. Fundamental analysis and technical analysis are the two schools of thought on share assessment and a balance between them is probably the most sensible approach.

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