Investors often pick stocks based on a number of factors that have nothing to do with the real value of the companies behind it.

Technical indicators such as volume often dictate how people trade stocks and other financial products. However this is clearly not the best way to generate a lot of returns in the market. Over the long term only those who are willing to calculate companies' values are able to determine if a specific stock is overvalued or undervalued.

For some of the most successful investors this has been the best strategy to employ in the stock market. Just focus on figuring out how much a company is worth, and then buy it for a price under that value you calculated. Over time the stock will appreciate in price. The price will slowly match the valuation you have calculated if you do it accurately. This means that instead of trying to predict whether a stock will go up or down during a specific time frame, it is much easier to just focus on the value of the company over the long term.

Value investing is all about valuation

Returns will then come from the difference in the price of the stock, and the real valuation of the business behind it.

Some of the most successful investors have been value investors. For a good reason. Instead of focusing on short-term price fluctuations, value investors focus on the value of the business and its ability to generate earnings and cash flow. They proceed to calculate the value of the company, and therefore they can tell if a stock is overvalued, fairly valued, or undervalued.

Most of these investors will often avoid overvalued and fairly valued companies. Instead, they focus on undervalued businesses that are sure to appreciate in price when the market finally accurately values the company. They focus on the value of stocks and nothing else.

Author's Bio: 

Sujit is a Digital markteter by profssion and bloggr by pasion. He likes to share the experience around the web. His blog is Blogsane.