Intrinsic value and Market value

Know the intrinsic value of the share before investing in any company. Market value probably might cheat you!

     Years ago, an instructor, while delivering a motivational class, promptly pulled out a currency note of Rs 500 from his pocket and asked the audience. ‘Suppose I am going to give this note to one selected person from you. In that case, if anyone of you needs it, please hands up’.  Initially everybody little bit surprised though, the entire audience quickly held their hands up.  The instructor watched everyone with a smile in his lips and without any hesitation, he crumpled the note in his fist like a waste paper.


     He again held the ugly looked currency note up to the audience and asked.  ‘Is there anyone one of you still needs of this ugly note?’  The entire audience still held their hands up.  Then the instructor, moving a step forward, dropped the note in the floor and set his shoes upon it and started crushing it as if he is extremely furious.  After, when he repeated the same question once more, still the audience held their hand raised!

     Seeing this, the instructor, with a big grin, said. “It is OK that all of you had held your hands up when I asked the question with a fresh note in my hand.  Then the same note I crumpled and even kicked on it. Even then any one of you didn’t move a bit back from the need. What might be the reason?”

     The audience had no answer. Therefore, he said.  “The reason is; each one of you knows about the real value of a currency note.  And also all of you know that the value of a note is never going to diminish when it gets crumpled or even it is being crushed under the feet”.

     But in stock market, the investors are probably getting confused, without having a clear idea about the real value of a share.  What is the reason for this?  In fact, each share has two types of values.  One is the value formed through the emotion based transaction of share holders which is called the ‘Market Value’.  The other one is the real value of a share which is called the ‘Intrinsic Value’.

     The ‘Intrinsic Value’ is commonly referred to the value which deserves to the share holder after deducting all kind of liabilities of the company.  Thus, all of you could realize the intrinsic value of Rs 500 because it doesn’t have a separate market value.  Or, the intrinsic value and the market value of a Rs 500 note are always same.

     But in share market, the investors, in many occasions, are not able to realize the intrinsic value of a share.  The share prices are always moving up and down in accordance with the emotions of investors. Therefore, though the share price weighted on bearish trends and it edges below the intrinsic value, none gets noticed the matter.  Rather, amid the massive bullish trend, when the shares are traded with high prices in high volumes, although the price is far above the intrinsic value, investors are emotionally getting impacted and racing to purchase the shares.  In fact, the billionaires like Warren Buffet and Benjamin Graham made huge gains from this sector because they could realize the intrinsic value of all shares that they were investing in.  But the people, even who know this fact, forget these matters while their investment opportunity arrives, which is the widely seen irony.