Equity valuation of the valuation of any asset can be considered an art. Valuation is not a perfect science and there is no single correct answer to what the value of the security must be. Valuation is at best an informed guess or opinion. Thus, when ProfitiX Broker analysts spit out the word value, they may be using it to describe one of the three concepts we will discuss in this article. It will about the differences between market value, intrinsic value, and investment value. Read on!
Market Value
The market value is the easiest valuation concept that one can understand. It simply refers to the value of a company or asset denoted by the current market price. As market prices vary wildly, so does the market value of any company or any asset which is listed on it.
Newbies in the market usually get confused trying to find out the difference between market valuation and market price. However, one can think that there is no difference at all. The fundamental idea is that markets are efficient and an any point of time the prices reflected by the markets are an informed decision made by the market. The market price is therefore the same as market valuation. And it is based on the idea of efficient market hypothesis.
Intrinsic Value
The idea of intrinsic value has been made famous by popular investors Profitix Broker Review from value investing school like Warren Buffett, Benjamin Graham, etc. Simply put, the intrinsic value is that value that is inherent to the asset. For example, a machine may provide certain incremental benefits to a user over and above what manual labor could have. As such the machine provides incremental cash flows to the firm and has some amount of intrinsic value
The value of the company is nothing but the sum of the total value that will be provided by its assets over certain time horizons. Therefore, the intrinsic value of the company can be estimated in the same way that the intrinsic value of an asset can be estimated.
Investment Value
Intrinsic value looks at the value of a firm in isolation. It only considers the value that can be derived from incremental cash flows that will be produced. However, consider the case of an oligarch that has only one competitor. The competitor is driving down the prices that the other could otherwise charge form the consumers. In this case, if the oligarch is able to buy out the competitor, he can then get rid of the competition and become a monopolist.
The benefits that will arise obviously cannot be computed using a simple discounted cash flow application. This may not be an ethical scenario. However, businesses have in the past witnessed these situations.
The idea is that sometimes corporations develop synergy when they combine their businesses. Therefore, some competitors may be able and willing to pay more for an asset or a company if it fits well with their existing business. This kind of valuation is called investment value.