Question

Why can the market price of a stock differ from its true (intrinsic) value? (Please give a new answer in 200 words or more)

Answer 1

Market value of shares refers to a price at which the stocks of the company are currently traded in the stock exchange. It is determined by external factors and expectations of the public from the company. Market value is the current value of the company share; it is reflected by the company's current stock price. It keeps on changing with respect to the factors like the goodwill of the company, demand for the stock in the market, the economic trends and a lot more.

Intrinsic value refers to the value driven by an investor's view point with respect to the inherent value of an asset. It is the estimate of the actual worth of the stock of the company. It is based on the present value of all the expected future cash flows of the company. It is determined by the internal factors and the measure of the net worth of the company. The changes in the assets and liabilities of the company impacts the intrinsic value of the company.

A company's financial objective is to maximize the wealth of the shareholders. This wealth refers to the intrinsic value of the stock. While considering this only the actual amounts are taken into consideration. It is a core valuation concept. While Market price is the price as seen from outside and is influenced a lot from the external factors. So the intrinsic value may differ from the market value of the stock; on the basis of the external factors that are influencing it.