What is the difference between intrinsic and market value of a stock?

In a way intrinsic value is the true but unobsered value of the stock whilst the market value is the observed trading price of the same stock. Generally Intrinsic value is derived from concepta such as DCF and is used to determine whether a stock at its current price is fairly valued, undervalued or overvalued.

In simple words, intrinsic value is the true value which is based on fundamental data like sales growth, dividends, net asset value. For example, your net asset value is US$1 billion, in simple words, your intrinsic value is just US$1 billion. That's simple. Intrinsic value differs market value. Market value is based on supply and demand, sentiment, perceptions, expectation and also hidden agenda etc., while intrinsic value is based on fundamental data. Because market value is also dominated by expectation and hidden agenda, market value cannot be considered as true value.

I would add that the discussion about the Intrinsic vs. Market value of securities is incomplete without mentioning the philosophy of Mr. Buffet and the late Mr. Munger, who always advocated for understanding the 'true value of a business.' Reading their annual letters or watching them speak about how to find value stocks and how to assess intrinsic value should be key if you are trying to understand the concept. One of the quotes from Warren Buffet says that the stock market is a 'voting machine' in the short term (i.e., reflecting the opinions of market participants) but a 'weighing machine' in the long term (i.e., reflecting the intrinsic value of businesses).

The intrinsic value of a stock, determined through methods like DCF or dividend discount models and gives the true/fair value of a company/stock. It relies on fundamental aspects such as earnings, growth, and dividends, and is free from market biases and sentiment to provide a more accurate valuation.

Intrinsic value is an estimate of the underlying value of a stock, based on fundamental analysis of the company's financial health, earnings potential, growth prospects, and other relevant factors where as the Market value is current price at which the stock is trading in the stock market.

Market Value of a Stock is that Value which is determined by the demand and Supply factor. Sometimes in the stock market, in order to increase Market value of a company, Demand and Supply can be manipulated. Demand can be manipulated by News, Growth Expectations and supply can be manipulated by reducing the free float.

Market value is theoretically based on supply and demand, but in reality, market value is also based on expectation, news, speculation or hidden agenda. That's why market value cannot be considered as the true value because sometimes the value is based on speculation or hidden agenda. For example, your net asset value is US$1 billion. The intrinsic value is US$1 billion, but the market value can be US$10 billion, because sometimes, there is a hidden agenda and expectation during the transaction.

For a fundamental and long-term investor, the market value is of relatively lesser importance compared to the intrinsic (think true hidden value) of the business. However, for a short-term trader, market value and the hourly, daily, and weekly changes in the market price of a security constitute all the meaning. If all else is equal and Intrinsic value > Market value, long-term investors should be comfortable investing in the security. At the same time, the opposite is true if the current Market value > Intrinsic value of the stock.

It is the trading value of the stock. While it is driven by demand and supply, news such as mergers, acquisitions, sell-off by key investors can deviate the stock price from its natural equilibrium. Market value of the stock can differ from the fundamental value due to difference in market perception of the stock from analyst calculation of the intrinsic value. The intrinsic value of the stock is based on assumptions and very sensitive to the underlying assumptions

Market value can deviate from intrinsic value for long periods of time but I believe that the price ultimately reverts back to the true value of the business. WeWork is a great example of a company whose market valuation grew beyond what the fundamentals of the company could support. The billions invested in that business disappeared when it reverted to its intrinsic value!

Intrinsic Value (IV) and Market Value (MV) are not the same. IV is a true value because IV is based on fundamental data like revenue growth, dividend, profit, net asset value, etc. While MV is not a true value, sometimes MW is called as Expected Price and also there is hidden agenda. For example: your net asset value is US$1 billion. The intrinsic value is US$1 billion, but the market value can become US$10 billion, because MV is dominantly affected by perception, expectation and also hidden agenda.

Intrinsic value is what a stock is truly worth based on its fundamentals. Market value is the current price in the stock market. They often differ, and investors use the comparison to make decisions.

That's the goal of value investing - to find companies that have great fundamentals and a high intrinsic value that the market has not yet recognized. If you can successfully find these companies, you will generate returns in excess of the market. Great examples of investors who've capitalized on this are Warren Buffet and Joel Greenblatt.

In an ideal Scenario, Intrinsic Value and Market Value can be the Same. Intrinsic Value is derived from internal or within factors while market value is derived from external factors. But sometimes it is possible that in the market, The company is undervalued and it is also possible that it is overvalued.

In reality, stock market across the globe is valued based on market value. It can be seen wherein some companies are valued based on Price Earnings Ratio (PER) Multiple. PER = Market Price/Earnings Per Share. For example: EPS = US$1, while PER = 20 times, so the market value is US$20 per share The reason why some investors are willing to pay 20 times higher than EPS? The answer is mystery! because all are related to the expectation and subjective. That is what expected prices are all about.

Its implications can be understood better by a Research Analyst. if the Stock is Undervalued means Intrinsic Value is more than Market Value,they can give a buy signal and vice versa.

When investors identify a stock with a market value lower than its intrinsic value, they may view it as a buying opportunity, expecting the market price to eventually rise to reflect the stock's true worth. This approach is rooted in the belief that the market will correct itself over time, aligning prices more closely with fundamental values. On the other hand, if a stock's market value is higher than its intrinsic value, it might be perceived as overvalued. This intrinsic versus market value analysis is at the heart of value investing, a strategy championed by investors like Warren Buffett. Value investors seek out stocks that are undervalued by the market but have strong fundamentals.

Market value has a lot of challenges. One of them is volatility and also unpredictable. Market value cannot be predicted precisely. Also nowadays, the market value is dominantly shaped not by supply and demand dynamics only, but rather by perceptions and concealed motives or hidden agenda. As for intrinsic value, the challenge is data accuracy.

In short, evaluating the intrinsic value is more of an art than a science. In traditional finance, we have a roadmap of techniques that can be used to find the intrinsic value of a stock. Such as DCF, DDM, Comps, etc However, it is still subjective because people (those who are trying to find the intrinsic value of the business) might have different assumptions that drive their valuation, different confidence levels in the company's strategy, and a very non-uniform macro outlook. All of these can be challenges to finding the real worth (intrinsic value) of a business, but as is understood by market participants - If everyone has the same opinions, then no one makes money!

Determining intrinsic value is quite difficult in practice not only because it requires a lot of research and relative analysis but also overcoming human biases. Numerous studies have shown that the overwhelming majority of active fund managers underperform their benchmarks over time. One study showed over 95% of active large cap fund managers underperformed their benchmark over a 20y period. While markets can be irrational, they can remain irrational longer than you can remain solvent (to paraphrase John Maynard Keynes).

Discounted Cash Flow analysis is one of the most popular methods for calculating intrinsic value. DCF analysis involves estimating the company's future cash flows and then discounting them back to their present value using a discount rate (often the weighted average cost of capital or WACC). This method hinges on the principle that the value of a company is the total sum of its future cash flows, discounted back to their present value. It requires making assumptions about future growth rates, profit margins, and the discount rate, which can introduce a significant degree of subjectivity. If a company pays dividends, one can arrive at the value of a stock, assuming the present value of all its future dividends (the DDM model).

Since calculations of intrinsic value include a lot of assumptions and the market price can deviate from fair value for long periods of time (longer than you can remain solvent), one of the most important strategies in investing is risk management. I personally believe in limiting the amount invested in any one trade idea to 5% or less of the total portfolio. No investor successfully picks only winners and making sure you don't blow up your portfolio when you get it wrong is critical if you're going to generate long-term gains.