Difference Between a Stock’s Current Price and its Intrinsic Value

Investing is a game that comes with its own set of rules, cautionary tales, and jargon that could drive a person mad. But these all have their fair place in the investment sphere, and here we will unravel some of the terminology to help you better understand what is meant by a stock’s current price (market value) and its intrinsic value. So let’s get started.

Current Price (Market Value)

A stock’s market value is the value reflected in its current stock price. It is seldom a true reflection of the company’s real value. Instead, market value is more a public sentiment about the company.

The reason is that this market value reflects the demand and supply mechanisms of the free market economy. The eagerness and willingness of investors to invest is a determination and representation of their willingness to participate in the company’s future.

If investor demand is strong enough, a company’s stock’s market value may be higher than its intrinsic value. This could lead to a stock being overvalued. If investment demand is weak, the result is an undervaluation of the company. For deeper insights into the over and undervaluation of stock prices, visit alphaspread.com. Invest with confidence!

Intrinsic value

Intrinsic value is a core metric that is employed by fundamental analysis-based investors to analyze a company. This is used to determine the true value of a company, analyzing if it carries a true value higher than it has been assigned by the market.

Both tangible and intangible factors are considered when setting and determining a value, such as market analysis, financial statements, and the company’s business plan. That being said, one can see that arriving at a company’s intrinsic value can be difficult.

Determination is up to the analysis chosen by an analyst, and these could include things like liquidation value, balance sheet book value, or discounted cash flow to include future earnings.

Current Market Value vs Intrinsic Value

Although both are ways of applying value to a company, they can hold significant differences overall. With intrinsic value this value is determined using expected future producing capacity and its ability to produce future cash flows. It is a separate value that is not influenced by the market value set at any point in time.

The market value is the value that is reflected by the current stock price, and it may be significantly higher or lower than the intrinsic value. These are two very distinct and different ways of valuing a company.

These two ways of putting a value on a company are unrelated in how they affect the other. Neither have a bearing on the determination of the other, and are used as information beacons when deciding on your next investment option. By understanding the differences, you are going to have a better chance of making money in the stock market.