Intrinsic value is a term that was originally coined by Benjamin Graham, an investor, and professor at Columbia Business School. It is a way of measuring the underlying worth of a company’s stock based on a set of factors rather than how it looks in terms of price.
This can be used to determine whether a stock is overvalued or undervalued and can also help guide whether a stock should be bought, sold, or left alone.
Intrinsic value is an important concept for anyone investing in the market for individual stocks or bonds because it provides a solid basis on which to analyze a company’s financial standing.
Why Does Intrinsic Value Matter in Business?
Intrinsic value is a fairly simple concept: It’s the amount that a company will be worth if it is completely liquidated and has to sell everything. Intrinsic Value can be used when making decisions about whether or not to purchase stock for several reasons.
Intrinsic value gives investors a gauge to determine how much they should pay for the shares. It helps determine whether or not a company is undervalued, fairly valued, or overvalued.
If the stock price of a particular company falls below its Intrinsic Value, investors may want to purchase additional shares in order to benefit from an anticipated rise in Intrinsic Value.
On the other hand, Intrinsic value can be used to determine whether or not a company’s stock is overvalued and whether or not shares should be sold. Intrinsic value is especially useful when it comes to making decisions about purchasing bonds.
When buying stocks for an initial public offering (IPO), Intrinsic Value is essential as it helps determine whether or not the stock will be successful after its first day of trading. This can also help investors decide how much to invest in stocks and bonds.
It is used when creating indicators like the price/earnings ratio, which measures Intrinsic Value over a number of years. Intrinsic value can be used to determine whether or not the market expectations are accurate and represent a good investment opportunity.
Intrinsic Value is also used when making decisions about whether or not to sell stocks and bonds if the value falls below certain thresholds. Intrinsic value is especially important when calculating Intrinsic Value per Share (IVPS) and Intrinsic Value per User (IVPU).
It can even be used when buying and selling cryptocurrency because Intrinsic Value is a financial metric that is used to determine whether or not a coin, or token, may be undervalued, fairly valued, or overvalued.
How Intrinsic Value Affects the Stock Market
Intrinsic value is an important concept in business but it can also be applied to the stock market to help analyze Intrinsic Value per Share (IVPS). Intrinsic value helps investors determine whether or not a stock is undervalued, fairly valued, or overvalued.
It can be used to identify opportunities where Intrinsic Value is low so that it may be bought and sold later when Intrinsic Value is higher. Intrinsic Value can also help determine whether or not it is wise to invest in an IPO.
Intrinsic value may be used when deciding whether or not to sell stocks and bonds due to the fact that Intrinsic Value can change over time based on market conditions.
Intrinsic Value in Personal Finance
Intrinsic Value is also used in personal finance when planning one’s Intrinsic Value per User (IVPU). Intrinsic value can help determine whether or not to buy a house, car, or other items.
For example, Intrinsic Value can be used when purchasing a home by calculating the Intrinsic Value of your monthly payments for housing, Intrinsic Value per Share (IVPS), Intrinsic Value per User (IVPU), mortgage rate, and amount financed.
Intrinsic value may also help an investor decide whether or not to invest in a home equity loan or second mortgage that would allow them to pay off their home much quicker.
Intrinsic Value may also be used when choosing between paying off the student loan early or graduating with a large degree of Intrinsic Value for your Intrinsic Value per Share (IVPS).
How To Calculate Intrinsic Value
Dividend Discount Models
One way to calculate Intrinsic Value is through a Dividend Discount Model (DDM). This involves calculating the future dividends of a company and estimating how long it will take before they are paid.
Intrinsic Value should be calculated at the current share price, not estimated or expected share prices in the future. This should be based on the average dividend over a number of years.
Residual Income Models
Another way to calculate Intrinsic Value is through a Residual Income Model (RIM).
Discounted Cash Flow Models
Another formula takes Intrinsic Value to be the present value of expected future cash flows discounted at the company’s cost of capital.
Inflation-Adjusted Intrinsic Value Models
This formula calculates Intrinsic Value as a company’s book value divided by the Consumer Price Index. This is due to inflation and Intrinsic Value should be adjusted accordingly. Intrinsic Value can also be thought of as Intrinsic Value per Share (IVPS).
The Bottom Line
Intrinsic Value is a measure of how much a company is worth. Intrinsic Value can be used to ensure an Intrinsic Value per User (IVPU) and Intrinsic Value per Share (IVPS).
Intrinsic value may also help investors determine whether or not it’s better to take out a mortgage or pay off one’s Intrinsic Value per Share (IVPS) early.
It can also be used to determine whether or not it is wise to invest in an Intrinsic Value per User (IVPU). Intrinsic value may help determine how much to pay for shares of stock.
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.