Intrinsic Value: Uncover Hidden Investment Opportunities

What is Intrinsic Value?

Intrinsic value is the fundamental value of an asset or financial contract, determined by analyzing its intrinsic characteristics and long-term prospects.

It differs from market price, which reflects current market sentiment and supply and demand dynamics.

Calculating Intrinsic Value

The intrinsic value formula calculates a company's worth by determining the present value of its future free cash flows to equity.

This involves forecasting the company's revenue, expenses, and capital expenditures over a specific period, typically 5 to 10 years.

Using Intrinsic Value in Investing

Value Investing

Value investors use intrinsic value to identify undervalued stocks trading below their true worth.

They believe that these stocks have the potential for significant returns as the market corrects and recognizes their true value.

Options Trading

In options trading, intrinsic value is the difference between the strike price and the current asset price.

It represents the "in-the-money" portion of an option and is a key factor in determining option premiums.

Key Takeaways

• Intrinsic value measures an asset's fundamental worth, while market price reflects market dynamics.
• The intrinsic value formula calculates a company's worth based on its future cash flows.
• Value investors use intrinsic value to identify undervalued stocks.
• Intrinsic value is important in options trading as it determines option premiums.

Reference

Investopedia: Free Cash Flow (FCF)