The worth of a [financial instrument] or asset is referred to as intrinsic value. Intrinsic value is also sometimes referred to as the equilibrium price.
It is in the best interest of a trader to know the intrinsic value of an instrument so that they can assess whether it is currently overvalued or undervalued by the market. This helps the trader decide upon their possible [entry] and [exit] points and strategies.
There is no set recognised formula for calculating the intrinsic value of an asset. Analysts and traders will use a mix of qualitative, quantitative, and perceptual factors on which to build a model to arrive at the intrinsic value. This process is commonly referred to as [fundamental analysis]. Some analysts or traders may apply more weight to qualitative measures whilst others may favour a more quantitative approach.
Three key techniques that are used to determine intrinsic value are asset-based valuation, discounted cash flow analysis, and analysis based on a financial metric. Discounted cash flow analysis, or DCF, is the most commonly used measurement method.
Key takeaways:
- Intrinsic value reflects the worth or value of a financial instrument or asset
- Intrinsic value can help traders buy or sell instruments that may currently be undervalued or overvalued in the marketplace
- There is no set formula used to arrive at the intrinsic value of an asset and analysts and traders will use various differently weighted methods to arrive at their own specific value
- Qualitative, quantitative, and perceptual factors will be taken into account when determining an asset’s intrinsic value in a process commonly referred to as fundamental analysis