What is Intrinsic Value?

Submitted by Sharemarket News on 13 May, 2011 - 16:47

Learn about intrinsic value.

Fundamental analysis introduces the concept of intrinsic value. Intrinsic value is the "real" value of a security. This implies that market prices are not true reflections of a stock's worth. This is where fundamental analysis comes in. For example, Trader X is following stock ABC, which is trading at $25. After doing his analysis however, he finds that stock ABC has an estimated value of $30, its 'intrinsic' value.

What does this mean? It means that Trader X wants to buy a stock that is trading way below it's approximate 'true' value. By doing fundamental analysis, Trader X estimated stock ABC's real value; he can therefore plan which way to jump and determine if he is actually buying at a discount.

If market conditions allow, Trader X's investment on stock ABC will pay off as market price catches up with the fundamental price of $30.

Remember that intrinsic value is an estimate, which means that the trader is still faced with unknowns such as the accuracy of this estimate and when the intrinsic value will be reflected in the marketplace. A time frame is important, as "over time" can mean days or years.