There are many different ways to make money in the stock market. There are the technical traders who use charts and formulas to predict future price movements. A hard-core technician doesn’t concern themselves with what a company does or even if it is earning a profit. If these investors see a pattern on their charts that says the companies stock should rise, they will jump into that stock. Trading “technicals” is one way of profiting from the stock market.

Another way of hoping to earn profits in the stock market is by looking at the fundamentals of a company. What you are doing here is researching a company or sector to see what are the most profitable companies out there. What you are looking for is a stock or stocks that are currently undervalued.

An undervalued stock is one that is currently trading for less than its intrinsic worth. Just because a stock is trading at say $25, doesn’t mean it can’t actually be worth more. If you look closer at the stock, it may have assets that place the value of the stock about $25 a share. Let’s look at a simplified example of this. Let’s say stock XYZ has 100,000 shares outstanding. If we look closer and find out that this company has cash on hand of about $3,000,000, what does that mean?  It means this stock is undervalued and a buy. Why? Take the cash that the company has on hand, in this case $3,000,000 and divide it by the amount of share outstanding. This comes out to $30 a share. But if you recall, it currently trades for $25 a share. You would be essentially buying $30 for $25.

Granted that is a simplified example, but believe it or not it does happen from time to time. This can occur when a whole sector goes down due to a few of the bigger companies losing money. A good example of this is the current recession. As you know, many of the larger banks got crushed with their stock prices as their losses mounted. Practically all of the banks stock went down during this time. By in the wreckage of that crash, there were many small and local banks that were still making money and showing profits. These were stocks that were undervalued. For those who did their research, they profited greatly when the banks stocks started to rebound.

As you can see, looking for most undervalued stocks can help you earn money in the stock market. Next time a whole sector gets smashed, look around for the companies that aren’t really effected by it and are still good solid companies to invest in.