How To Find The Intrinsic Value Of A Stock

Before venturing into the concept of stock investments, you first need to understand what the intrinsic value of a stock means. In a nutshell, it is the actual value of something based on simple assumptions, be it an object or a financial instrument. Hence, the intrinsic value of any stock means the true value of a stock determined by certain key factors.

Importance of intrinsic value of a stock

Calculating the intrinsic value of a stock helps you to understand the monetary benefit you can derive from the stock in the future and how much you need to buy the stock in the present.

Intrinsic value explained

The process of intrinsic value of a stock calculation is a vital part of planning strategic investments in the stock market. There are usually two broad methods that can help:

• Present value method: When you invest in a company’s share, the company pays out an annual dividend to its shareholders. Under this method, you will have to take into consideration the discounted values of all future dividends and add them to the discounted terminal value of the share. It is usually suggested to go for discounting, as yearly inflation reduces the value of money over time.

Intrinsic Value = Discounted Dividend + Discounted Terminal Value of Stock

• Relative value method: Another intrinsic value formula, this method does not involve many variables like an estimation of dividends, discounted rate based on inflation, discounted terminal value, etc. If you want to know whether your decision to buy a stock was fruitful, you need to compare the company’s price to earnings per share (PE) ratio to the industry standard. You can also determine the intrinsic value by simply multiplying the PE ratio to the earnings per share (EPS).

Intrinsic Value = PE Ratio x EPS

How to find the intrinsic value of a stock could be an interesting topic yet it seldom has a real-life application. While the stock market usually does have the intrinsic value of a stock, it may not align itself to the actual price of the stock, as most stocks are traded on speculation.

Moreover, share intrinsic value requires a whole lot of calculations and may be unstable due to various kinds of assumptions. Again, many asset classes have difficulty when it comes to intrinsic value.

Taking your first step towards stock market investments

Share intrinsic value calculator is used by many experts and, in some cases by retail investors, to gauge if they have made smart investment decisions. If you want to dabble in the stock market and invest in stocks only after calculating their intrinsic value, it is advisable to think long-term to make your investments work for you.