Investing term

What is Valuation gap?

The difference between what a stock is worth (estimated) and what it currently trades at.

A valuation gap is the difference between your estimate of what a stock is worth and the price it currently trades at. A gap where price sits below value is the opportunity value investors hunt for — but it only pays off if the market eventually closes it, which is why a catalyst matters. A persistent gap with no reason to close can just be a value trap.

For example

You judge a company worth $90 while it trades at $60 — that $30 valuation gap is your potential upside, if something makes the market re-rate it.

Valuation gap is taught hands-on in Stage 13 — Active Investing: Should You Even Bother?.

See the lesson →

Related terms

Active investingPicking individual stocks (or actively-managed funds) instead of just buying the index.CatalystThe event or condition that will close the valuation gap — and an estimated timeline.Circle of competenceThe set of industries, business models, and types of companies you actually understand well enough to evaluate.ConvictionHow strong your evidence is for a thesis — and therefore how much capital it earns.
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