There are many questions coming to investor's mind before investing like
What would be the market value of the share?
What is the actual value of the company to its share price?
Is the price fair at the time of investment?
Let us find what does it mean:
Simply put intrinsic value is the value of the firm/company based on its true value including all its aspects of business in terms of tangible and intangible. It is a value which is already imbibed in the asset. It is the perceived value of the underlying security which differs from its market value.
The value of the firm is the value which the total assets will deliver over the period. Just as intrinsic value of an asset is identified same way intrinsic value of firm is also identified.
This is usually calculated by analysts using “Discounted Cash flow” Valuation method.
Long term investors looking for value investments consider “Fundamental Analysis” wherein they look at qualitative (governance, business model, management) and quantitative (ratio analysis, financial statements) aspects of the business.
The value which the buyer or the investor is willing to pay for the asset at any given time is called Market Value. i.e. the market value of the company is the price at which the buyer is willing to buy the shares at the prevailing market price.
“Intrinsic Value” may or may not be same as “Market Value”. In rare cases, they do match. But the point is they differ from each other. The selling price for a stock is the market price which the seller is willing to sell and buyer is willing to buy.
It is the fair Market value. But what is the value of the company at that point? Both these prices guide investors and analysts to gauge whether the stock is overpriced or under-priced. When the market price is higher than the intrinsic value it is overpriced or overvalued. Here the investor would avoid or stay away from buying the stock. Similarly, when the Market value is lower than the Intrinsic value it is under-priced or undervalued. Here the investor would investor readily invest stock as the shares are available at a discount.
In the above example, there are 2 companies called “ABC Ltd” and “XYZ Ltd”
As we can see in the above table Market Price of ABC Ltd is greater than Intrinsic value stating that it is overvalued. On the other Market Price of XYZ Ltd is lesser than Intrinsic value stating that it is undervalued. Taking into considerations the qualitative and quantitative aspects of both the companies, an investor would be going with XYZ ltd because the price is available at a discount and at a cheaper rate.
Value investors always look at a longer time horizon. They focus mainly on companies which have competitive advantage in their industry. The fundamentals of the company play a pivotal role in investors decision. They only buy stocks at discount to their intrinsic value and they stay invested patiently for the fair value of their investments to be realised. Daily price fluctuations are ignored and they try to match their invested amount with the intrinsic value of the company. Ideally one should sell when the stock is overvalued to get good profits and buy at dips by adding positions in the market.
On the other hand, daily traders look at Market value because they do not have time to wait for intrinsic values to match with market values. They churn their portfolio very quickly on short term profits seeing the market trends, price charts, technical indicators either uptrend or downtrend. In a bearish trend, traders tend to short the stock and buy at lower levels (lower market value).