Most of the people often confuse between the Intrinsic value and Market value of stock, though both are ways of valuing a Company but there is a huge difference between the two terms.
Let us clear this with a simple example:
Suppose the price of a share is
Rs.1000, this is the Current Market Price
(CMP) of the stock but how will we decide whether the price is undervalued
or overvalued??
We do not want to purchase a stock
that is ten times then its valuation, even if it’s a good Company but that is
not a good investment.
And that’s why valuation is a
crucial factor while deciding whether to invest in a stock or not.
Definition:
Intrinsic Value: Intrinsic value estimates the actual value of a Company,
regardless of market value. It is a fundamental analysis used by value investor
to analyze a company.
Number of factors including
financial statements, management, market analysis and Company’s growth
projections are considered while settling the estimated true price of the
stock. The value is determined by incorporating all applicable information and data
necessary to value a company.
Investors generally buy the
stocks that is trading at or below intrinsic value.
Market Value: Market value is the current value of a Company
reflected by the Company’s Stock Price and rarely reflects the actual value of
a Company; therefore, it is different from the actual value of the stock.
Market value is a measure of
Public sentiment. It reflects the demand and supply in the Investing Market.
Market value is usually higher
than the intrinsic value if there is strong investment demand, which leads to overvaluation
of stock and low demand leads to undervaluation of Stock.
What should we look while investing??
Market price is usually higher or
lower than the intrinsic value of a stock.
If Market value > Intrinsic Value,
then stock is overvalued.
If Market Value < Intrinsic Value,
then stock is undervalued.
Investor always look for undervalued
Companies to invest.
However, it is very difficult to
determine the Intrinsic and Market value of a stock for a private Company as
these are not traded on the stock Market.
Investor and traders have made good wealth in the stock market in past few years, therefore more and more people are taking interest in stock Market. There are two methodologies in the stock market; Fundamental and Technical Analysis which investors and traders looks while doing stock selection.
Lets us understand the difference between the two.
Fundamental
Technical
Long Term Approach
Short Term Approach
Goal is to find the intrinsic value of the stock
Goal is to find the right time to enter or exit based
on the past and current trend
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