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value trap
What does value trap mean?
A value trap is a stock that looks like a bargain on metrics like a low P/E or high dividend yield but is actually a declining business whose price keeps sinking. The apparent value is illusory.
"It looked cheap at 5x earnings but was a value trap as the business kept shrinking."
Origin
Combines 'value' investing with 'trap'; the low valuation lures value investors into a losing position.
Frequently asked questions
What is a value trap?
It's a stock that looks cheap on metrics like a low P/E or high dividend yield but is actually a declining business whose price keeps falling, so the apparent value never pays off.
How is a value trap different from a genuine value stock?
A real value stock is temporarily underpriced and recovers, while a value trap stays cheap or gets cheaper because the underlying business is deteriorating.
How do investors avoid value traps?
By looking past the low valuation to the fundamentals, checking whether earnings, revenue, and the business are actually stable or shrinking before buying.
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