Question

Explain the distinction between a stock’s price and its intrinsic value. Why is there a difference? How do stock traders decide how much to pay for a stock? What factors do you think should go into their decision on price?

Answer 1

Stocks price only tell the current market value of a companys per share price. It varies depend on the supply and demand for the stock and generally tend to go up for positive news and go down for negative news.

Whereas Intrinsic value of the company is its actual worth which include tangible and intangible factors and are found out by fundamental analysis. Intrinsic value can be calculated by going through the financial statements of the company, its future plans and future growth potential. Through several methods like Dividend discount model, DCF etc the fare value of the company can be calculated.

When compared to this intrinsic value a company can be overvalued( stock price higher than fare value) or under valued(stock price lower).

There is a difference between market value of stock price and its fare value because of many factors as below.

• Demand and Supply can significantly affect stock price
• Interest Rates changes by the central bank
• Involvment of investors who purchases the stock in bulk
• Dividends provided by the company
• Management change or problems in management
• Economy and political climate of the country

Mostly the short term increase or decrease of the stock value happens due to sudden unexpected news which can affect the company and because of this there will be a difference in either supplier side or demand side. Due to this stock value reduces or increases.