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        Fundamental Analysis

        Views 31092022.09.21

        Why does intrinsic value and market price differ for stocks?

        In the world of investment, investors are constantly looking at companies that are undervalued or overvalued compared to their intrinsic value so that we could harvest the difference between market value and intrinsic value. That may sound easy, but it's often hard to achieve in real life, considering Intrinsic value is an estimate of the true value of a company.

        Market Value, on the other hand, often refers to market capitalization which is simply the multiple of outstanding shares and the share price. Most of the time market value is significantly different from the intrinsic value which drives the market to be moving constantly.

        Intrinsic Value

        Intrinsic value is a core metric used by value investors to determine if a company is worthy to invest in. A value investor would either invest in stocks that have a market value that is lower than its intrinsic value, or short stocks that has a market value that is higher than its intrinsic value.

        Intrinsic value is difficult to determine since it's a complex of a company's both tangible and intangible assets, which includes financial performance, market sentiment, economic moat, and business strategy, etc. It's extremely difficult to define a certain price of these factors for both individual investors and professionals. It's very common for different investment firm provides different price expectations for a company.

        There are multiple ways to define intrinsic value. One of the most common is estimating by Discounted Cash Flow model. The intrinsic value of a company is the present value of the future free cash flows of the company in DCF calculation. However, this method only measures financial performance and is limited by model risk.


        Market Value

        Market value is the company's value calculated by multiplying its current share price and outstanding shares amount. It rarely reflects the actual value of the company. Since the market value of a company is highly correlated to the market sentiment about a company. The share price of a company could be pushed by a market frenzy to any price. The perfect example is the meme stocks that are favored by WSB investors in 2021.


        The market value is normally higher than the intrinsic value of the company if there is strong investment demand, which could cause a possible overvaluation. The opposite is true if there is weak investment demand, which can lead to the undervaluation of the company.

        Source: Investopedia

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