What is intrinsic value?
Intrinsic value is hidden or real value of any share. Then how it is different from market value of shares? To answer this you need to understand that market value of any share is influenced by so many external factors like news in market, greed in investors and political condition etc. And calculating intrinsic value we exclude all these factors so that we can reach the real value of any given share. Now we easily understand that market value and intrinsic value can be differ with each other.
|Intrinsic value and how to calculate intrinsic value|
Need of calculating “intrinsic value”
It excludes all the external factors from shares which influenced its price and tell us real value of it. It provide margin of safety and minimize our risk factor if rightly calculated. It tells estimated amount which we will earn in future. It reveals the secret that stock in undervalued or overvalued.
How intrinsic value of stocks is calculated?
There are mainly two ways through which anyone can calculate intrinsic value of any given stocks:-
1. DCF(discount cash flow) model
It’s a beautiful combination of both investing style “value investing and fundamental investing” by calculating from both prospective- ratio and growth.
Simple but not popular in practice.
Limits of intrinsic value or calculating intrinsic value:-
For the calculation you need high understanding of fundamental analysis. It based on how accurately you predict company’s future earnings.
Intrinsic value provide margin of safety if rightly calculated. If you are here to invest in share market that is the first thing you need to learn. If you have listen the interviews of great investors, they have one thing common that all talked about intrinsic value of shares, you can say that key of success in investment is “accurate calculation of intrinsic value”.