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Intrinsic Value of Stock

What Is Intrinsic Value of Stock?intrinsic value of a stock

Singaporeans who do not know or care what is intrinsic value of stock are either not investing in stocks or not believing the importance of fundamental analysis. I used to be one of them who dived into technical analysis and did my stock trading using some proprietary trading system tools. Guess what? My experience was pretty bad even though i exercised cut loss diligently. To trade stocks frequently for a consistent profit needs a high control level of own emotion. That quick memorable but very painful experience had cost me over S$90,000 ten years ago.

Intrinsic value of stock refers to the actual value of a stock or what the company is really worth. Intrinsic value of stock is not referring to its market price or its book value. This intrinsic value may not be that straightforward to calculate as one needs to consider its management quality, brand value, patent rights, competitive edge, research and development capabilities, other tangible and intangible factors. The intrinsic value of a company may be lower or higher than its stock market value, indicating that the company is undervalued or overvalued.

In Singapore, option trading is not offered in SGX. This paragraph may interest to those Singaporeans who are exploring option trading in US market. To an option trader, he or she will interpret an intrinsic value of stock is the difference of a higher stock market price minus off its strike price. If the stock price is less than the strike price, the call option has no intrinsic value. This call option concept is quite related to the Sean Sean’s value investing options strategy. Take for an example, a call option for 100 shares has a strike price of $10 and its current stock price is $15. This means the intrinsic value of this stock is $5. If the stock price falls to $10 or below, the call option is simply not worthwhile to invest because it has no intrinsic value. Same analogy can be applied to a put option as well.

As a value investor, one will like to search for stocks or other assets with a market price far below the fundamental value. Value investors will often set a margin of safety which is the amount of discount below the intrinsic value to minimize the risk of investment over a longer period of time.

Is Intrinsic Value of Stock Easy To Calculate?

The answer is a straight no and i don’t even bother to quote the complex formula here to scare you off. A stock has many tangible and intangible variables to consider as these variables can affect future cashflow, growth and the discount of risk. As compared to another asset called bond, its intrinsic value is much easier to calculate because its cashflow and growth are usually fixed. This leaves only one variable which is the discount of risk of the interest not being paid and the cost of the capital.

I am more inclined to smart value investing rather than spending too much time to calculate what is the intrinsic value of each stock to decide on the market entry point. Value investing should be made easier.
If you are keen to know more about smart value investing, you will be amazed how easy this can be. Register now to attend Sean Sean’s free value investing seminar (worth S$297) by filling up the form at the top right area of this webpage.

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