Value stock
A stock classified, typically for index and benchmarking purposes, as cheap relative to its fundamentals — low price-to-book, low price-to-earnings and high dividend yield being the workbook's own ratio criteria.
In plain language
Style indices need a rule for sorting stocks into buckets. Value stock is one of those buckets.
The workbook's own rule uses three ratios together: a stock with low price-to-book, low price-to-earnings, and high dividend yield is categorised as a value stock. A stock with the opposite profile — high P/B, high P/E, low dividend yield — is categorised as a growth stock instead.
A value-oriented investor, the workbook explains, focuses on the price side of the P/E ratio: believing the price is cheap relative to earnings, and betting the market will correct that gap.
How it works
Section 12.5.3 gives the ratio-based rule: "Stocks with low P/B, low P/E ratio and high dividend yield are categorized as value stocks."
Section 12.5.4 then builds this into index construction: the workbook's 3 broad market-capitalisation groups (large, mid and small cap) are blended with its 2 investment styles (value and growth) to create 6 cap-and-style segments — Large cap value, Large cap growth, Mid cap value, Mid cap growth, Small cap value and Small cap growth — used as benchmarks for portfolio managers running a specific style.
The workbook adds a practical note: style indices have higher turnover than broad market indices, because valuation ratios change over time and stocks migrate between the value and growth buckets at each reconstitution date.
A worked example
Illustrative figures, applying the workbook's own ratio rule. Two large-cap FMCG stocks are compared for style classification.
| Ambience Foods (candidate: value) | Zenith Beverages (candidate: growth) | |
|---|---|---|
| P/E | 11 | 42 |
| P/B | 1.4 | 9.5 |
| Dividend yield | 4.8% | 0.6% |
Ambience Foods has low P/E, low P/B and high dividend yield against the sector, so it is classified a large-cap value stock. Zenith Beverages has the opposite profile and is classified a large-cap growth stock. A Rs 50,00,000 style-based PMS mandate benchmarked to a Large Cap Value index would hold Ambience Foods and screen out Zenith Beverages, purely on this ratio classification, regardless of either company's absolute quality.
Why NISM asks about it
Chapter 12 (Introduction to Indices), sections 12.5.3 and 12.5.4, give the ratio-based rule for classifying value and growth stocks and build the 3-by-2 cap-and-style index structure from it. Expect a question applying the P/E, P/B and dividend-yield rule to a stated stock profile, or one naming the six cap-and-style segments.
Common exam traps
- Low P/E, low P/B, high dividend yield = value stock; the opposite three = growth stock — the exact three ratios the workbook uses, together, not any single one in isolation.
- 3 cap groups × 2 styles = 6 named segments (Large/Mid/Small cap, each Value or Growth) — a question may simply ask you to name or count these.
- A value-oriented investor focuses on the price (numerator) of the P/E ratio; a growth-oriented investor focuses on earnings (the denominator) — the workbook's own framing of the difference in mindset.
- Do not confuse this ratio-based index classification with the workbook's separate value investment style discussion in Chapter 18, which adds further screens (PEG, P/S, P/CF, debt-to-equity) beyond these three.
Where this is taught
Free preparation for NISM Series XXI-BRelated terms
- PEG ratioThe price to earnings ratio divided by the expected earnings growth rate — Peter Lynch's way of asking whether a high P/E is justified by the growth behind it.
- P/E ratioShare price divided by earnings per share — how many rupees investors pay for each rupee of earnings. The most common relative valuation measure.
- Undervalued securityUnder CAPM, a security whose estimated return plots above the Security Market Line — earning more than its systematic risk (beta) warrants under market equilibrium.
- Value investment styleAn investment management style of buying stocks priced below their intrinsic value, on the belief that the market has mispriced them and will correct that mispricing over time.
- Value trapA stock that looks cheap on value screens like low P/E and high dividend yield, but never re-rates because its business is genuinely weaker than the screens suggest, not merely overlooked by the market.