Do Not Call
When evaluating a stock, two commonly referenced concepts are market value and intrinsic value. While market value reflects the current trading price, intrinsic value represents what an investor believes the stock is actually worth based on fundamentals. Understanding the difference between the two can help investors avoid overpaying and identify undervalued opportunities.
Market value, also known as market price, is the current price at which a stock or asset trades on an exchange. It is determined by supply and demand and can fluctuate in real time due to news, earnings reports, and market sentiment.
Market value is shaped by several key factors:
Reflects the price at which investors are willing to buy/sell
Influenced by market conditions, investor behaviour, and liquidity
May deviate significantly from a company's financial fundamentals
Example: If shares of Company X are trading at ₹800, the market value per share is ₹800.
Intrinsic value is the estimated true value of an asset based on its underlying fundamentals, such as cash flow, revenue, growth prospects, and risk. It is not directly observable in the market and varies depending on the valuation method and analyst assumptions.
Intrinsic value has distinct features that investors should consider:
Based on financial models and future projections
Helps identify overvalued or undervalued stocks
Subjective and varies from investor to investor
Example: If fundamental analysis values Company X at ₹950, while it trades at ₹800, the stock may be considered undervalued.
Intrinsic value can be estimated using several common methods:
Discounted Cash Flow (DCF) Method
Projects future cash flows and discounts them back to present value
Formula:
Intrinsic Value = ∑ (Cash Flow in Year t ÷ (1 + r)^t)
Where r is the discount rate and t is the year
Dividend Discount Model (DDM)
Used for dividend-paying stocks
Formula:
Intrinsic Value = D ÷ (r – g)
Where D is expected annual dividend, r is discount rate, g is growth rate
Relative Valuation using Ratios
Compares P/E, P/B, EV/EBITDA with industry peers
Helps assess fair value range rather than absolute number
Calculating intrinsic value often involves assumptions about growth, risk, and market conditions, which can make it subjective.
Key differences between market value and intrinsic value include:
Feature |
Market Value |
Intrinsic Value |
|---|---|---|
Definition |
Current trading price on stock exchanges |
True worth based on fundamental analysis |
Visibility |
Publicly visible in real time |
Estimated through analysis |
Volatility |
Highly volatile |
More stable |
Influencing Factors |
Demand-supply, news, market mood |
Earnings, cash flows, growth potential |
Used For |
Trading decisions, pricing |
Long-term investing, value assessment |
These values are illustrative. Real-life evaluation requires deep analysis and updated financial data.
Company |
Market Value (per share) |
Estimated Intrinsic Value |
Observation |
|---|---|---|---|
ABC Ltd. |
₹500 |
₹650 |
Possibly undervalued |
XYZ Ltd. |
₹1,200 |
₹1,000 |
Possibly overvalued |
DEF Ltd. |
₹750 |
₹750 |
Fairly priced |
Understanding the gap between market and intrinsic value guides investment decisions:
Market value > Intrinsic value: The stock may be overvalued, posing a higher risk
Market value < Intrinsic value: The stock may be undervalued, offering potential upside
Market value = Intrinsic value: Indicates fair valuation
Value investors often use this difference to buy low and sell high based on perceived mispricing.
Legendary investors like Warren Buffett and Benjamin Graham have emphasised the importance of intrinsic value in making long-term investment decisions.
Value investing strategies often focus on identifying companies where the estimated intrinsic value is significantly above market price
Such strategies typically emphasise strong fundamentals and consistent cash flow profiles
Avoid market noise and focus on the business's core strengths
Both market value and intrinsic value have their limitations:
Limitation |
Market Value |
Intrinsic Value |
|---|---|---|
May reflect temporary sentiment |
Yes |
No |
Can be inaccurate if data is outdated |
No |
Yes |
Subject to speculation and panic |
Yes |
No |
May depend on unrealistic growth projections |
No |
Yes |
In India, platforms like Screener.in, Tickertape, and Value Research Online provide basic intrinsic value estimations. However, these tools rely on default assumptions, and users should customise inputs based on their research.
Indian retail investors are increasingly focusing on intrinsic value to make informed long-term decisions in volatile markets.
While market value tells you the price you pay, intrinsic value reveals the worth you get. For thoughtful investing, especially in long-term equity, understanding the difference between market value and intrinsic value is crucial. Relying solely on market prices can lead to emotionally driven decisions, while intrinsic valuation helps investors remain grounded in fundamentals.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
No. Book value is based on accounting figures, while intrinsic value includes future cash flows and growth potential.
Generally no, unless a company has sustained negative cash flows or liabilities far exceed assets.
Not necessarily. While undervaluation is attractive, other factors like quality of management, debt levels, and market conditions must be considered.
Whenever there is a major change in company fundamentals, earnings forecast, or macroeconomic environment.
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