What Is a Value Trap? Definition, Signs, Example

What Is a Value Trap?

By Kristi Waterworth – Updated Nov 7, 2024 at 2:08 PM

Key Points

A value trap appears cheap due to low P/E or P/B ratios but may be a poor investment.
Signs of a value trap include inconsistent profits and unmanaged costs.
Comparing a company to its sector helps avoid value traps by revealing relative performance.

Every investor wants to find a company that's a bargain, but sometimes, those awesome bargains aren't what they seem. These companies are known as value traps. A value trap can cost you a lot, but there are ways to avoid them if you're careful.

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Infographic defining a value trap — Image source: The Motley Fool

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Gross Profit

Gross profit is the profit a company makes after deducting the direct costs associated with providing a product or service.

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The weights of your stocks can play a big role in your investment strategy. Here's how to calculate them.

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Everyone has their own risk tolerance and investment goals. Create a portfolio that balances each.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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