INTRINSIC VALUE AND ITS IMPORTANCE
Intrinsic value is a way of describing the perceived or true value of an asset. This is not always identical to the current market price because assets can be over-or undervalued. Intrinsic value is a common part of fundamental analysis, which investors use to assess stocks, as well as being used in options pricing.
As a new investor, you should be aware of certain financial terms used in the market and for the stocks and assets that you want to invest in. intrinsic value is one such term that broadly means the worth or value of the asset, stock or bond of a company.
This intrinsic value may or may not be similar to the current market value of the stock. This value plays an important role in the financial analysis of the company’s stocks and helps the investors choose the right investment.
The financial analyst will conduct a fundamental and technical analysis of the company to estimate the intrinsic value of a stock or asset of that particular company. The factors that are considered while estimating the intrinsic value of a stock are the business model of the company and target markets.
The analysts usually take all aspects and factors into consideration including qualitative, quantitative, and perceptual factors while estimating the intrinsic value to help the investors but the investors should still keep in mind that it is only an estimate.
IMPORTANCE OF INTRINSIC VALUE
Intrinsic value is important because it can help investors understand whether the cost of an asset is undervalued or overvalued compared to the market value of the asset. Knowing how to determine the intrinsic value of an asset can help you make well-informed investment decisions and helps investors who are looking to purchase investments at a rate that is lower than their worth.
Also, Intrinsic value when compared to the current market value of the stock helps to decide whether the stock is a good buy or a good sale.
The stock is considered to be a good buy if the current market price of that stock is below its intrinsic value. Whereas, the stock is considered to be a good sale if the current market price is higher than the intrinsic value of that particular stock.
EXAMPLES OF INTRINSIC VALUE
In share trading, intrinsic value can refer to the ‘true’ value of a company as perceived by a trader or investor. Different traders will have different ideas of what constitutes intrinsic value for a stock, with some giving prominence to strong fundamentals and others looking at its potential for growth.In share trading, intrinsic value measures the inherent value of a share, while extrinsic value measures how much of its worth is derived from external factors.
