Finance / Fundamental Analysis / Investments · January 26, 2022

What Is The Difference Between Intrinsic Value And Market Value

Introduction

Intrinsic value and market value are forms of identifying the valuation of the company in real time basis. The major difference between intrinsic value and market value is the driving force behind the valuations.

Market value is dependent mostly on the external factors like demand / supply, national economy, sector performance etc. On the other hand, the intrinsic value is dependent on internal factors like company assets, revenues, company’s performance over time, net profitability and future returns.

One may note that the prices for market value tend to change on daily basis. As there is a demand for a particular stock, the market value tends to increase. Intrinsic value will only change due to the change in the internal well beings of the company.

What is market value

Market value is the real time price as traded on the stock exchange. Thus, this is the value at which the equities of the company are brought and sold. In case of a private company, market value is the price at which the promoter transferred the equity to the investor.

Supply and demand determines the market value. The market price of a stock will grow above its inherent worth if there is substantial investor demand for it.

What is intrinsic value

Intrinsic value is termed as the real value of the company. It is the value of the company that is drawn from the assets it owns, its business model, the past revenues and future growth. All these factors determine the intrinsic value of the company.

Here are the five differences between market value and intrinsic value

Change of values with time

Valuations tend to change with time. Market values are dynamic in nature. The market value of a company, not only depends on the performance of the company, but the overall economy of the country. It also depends on the performance of large companies in the stock market, how the global and national indexes are performing and the overall economy of the country.

Intrinsic value of a company merely depends on the change in the internal factors of the firm like acquisition of assets, revenues generated and the overall profitability of the company.

Impact of behavioral economics

The behavior of the market participants directly influence the market value of a particular company.

When the entire market is in selling mode, the market value of the company can drop to even unrealistic lower valuation. If the market is in buy mode, the market cap of that company can sky rocket without the internal valuations being unchanged.

The intrinsic value, on the other hand, does not change with the perception of the people. They are strongly dependent on actual valuation of the company.

In terms of valuations of a company

Since market valuations are dependent on the behavioral aspects of the people, the valuations can change from unrealistic high to unrealistic low.

This is the beauty of market value. Investors with thorough analysis can identify company that are trading at market value lower than the desired valuations and buy the shares at a good valuations.

Intrinsic value is the true value of the company. Hence, one needs to understand that intrinsic value is more of a theoretical value.

At the end of the day, the shares will be traded at market values only, irrespective of the intrinsic value it deserves.

Intrinsic value can be used as a benchmark to gauge the market price and decide if the stock is available for high or low valuations.

Mode of calculation

The price at which the company is trading or the promoter is willing to exchange is termed as the market value. One may predict the market value by the use of trend lines or charting patterns. But cannot clearly define the future market value of any company.

There are different methods to calculate the intrinsic value. All these methods will give a different intrinsic value to the company. It depends on the approach one has taken to find these valuations.

Calculation of the intrinsic value can be a difficult process. There are a set of experts like Research Analyst and investment advisors that guide the retail investors. They conduct proper SWOT analysis and conduct various research to arrive at a fair value before investing.

One of these method of valuation is Sum of All Parts (SOTP) form of valuation.

Demand and supply

The market value of a company can change due to the demand and supply of shares available to trade. If the demand is very high, the market value tends to rise. On the other hand, if the demand is low, the market value will tend to fall.

The intrinsic value is independent to the demand and supply of shares. This value will change only when there is change in the fundamentals of the company.

Conclusion

The promoters and stakeholders can manipulate the market value of a firm to some extent. But manipulating the intrinsic value can be difficult.

One needs to thoroughly understand the intrinsic value of the company before investing and not just focus on the market value.

Bonus tip

One may use the intrinsic value of a company to gauge the market performance.

If the market value of the company is lesser than the intrinsic value, the company will be available at a discount and it can be considered a good buy.

On the other hand, if the market value is higher than the intrinsic value, one may be certain that the company is over valued and not be considered a good buy.

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