Question

Why can the market price of a stock differ from its true (intrinsic) value? (In 300 words or more)

Answer 1

Solution) The market price of the stock can be different from the intrinsic value of the stock. Key reasons for the difference include:

a) Intrinsic Value of the stock is based upon the fundamental factors such as historical data, previous growth witnessed by the company, current outlook of the company, growth opportunities available with the company, etc. While the current price of the stock is most of the time driven by the investor's sentiments. The market is not always efficient and hence when the sentiments are positive then the stock price of the stock could be greater than the intrinsic value while when the sentiments are negative then it could fall below the intrinsic value.

b) Moreover, stock prices are determined on the basis of the demand and supply of the shares of the company. Hence, as the new information about the company is available, the stock price will either increase or decrease while the intrinsic value already included the impact of the new information which is being available in the market.   

Thus, the market value of the stock can vary from the intrinsic value of the stock.

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