Definition of 'Intrinsic Value'
Intrinsic value is the true value of a stock or security, regardless of the market or book value. Included in the intrinsic value is brand and trademark, which is often difficult to calculate and may not be reflective of the actual market price.
TheStreet Explains ‘Intrinsic Value’
Intrinsic value is typically determined by finding the estimated earning power of the stock or security. The earning power is established through having access to the security’s statistical or factual evidence such as assets, earnings, and dividends. Once determined and estimated, the figure is multiplied by a capitalization factor. A capitalization factor is the conversion from expected income into a value. A simple calculation would be: intrinsic value = stock price -strike price (or fixed seller price) x options.
Ultimately, the goal of intrinsic value is to identify which stocks are trading for less their intrinsic value, allowing the investor to buy low and hopefully someday sell high. A number of factors influence a stock or security’s intrinsic value and can be driven primarily through newsworthy activities and perception. A negative event can lower a company’s intrinsic value, despite recorded statistics on the books. This negative activity allows for a stock to trade low.
In general, intrinsic value is the investor’s perception of the stock or security’s innate value. For stocks in particular, intrinsic value is not as straight forward and a number of calculation methods can be used. Other methods to determine intrinsic value for stocks include discounted flow analysis, financial metric analysis and asset-based valuation.
Discounted flow analysis (DCF) is based on the future cash flow in relation to corporate value. The investor has to consider if the current cash value is just as valuable as it will be in the future. Inflation and yield must be considered to decide whether the risk is worth the wait or if the current cash flow is a better investment situation.
Financial metric analysis is typically considered with other factors. Mainly used to determine intrinsic value is the examination of the price-to-earnings ratio (P/E) and is the least exacting formula.
Terms Related to 'Intrinsic Value':
Discounted Cash Flow (DCF), is a method used by analysts and invest...
The price-to-earnings ratio, or P/E ratio, is a widely used meas...
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