INTRINSIC

INTRINSIC VALUE OF A STOCK : whenever we come to the world of investing we generally get confused with the psychology and momentum of investing which is commonly known as emotional intelligence, due to the least valuation of emotional intelligence inherited by a person which causes the least value in choosing stocks.

in order to get the correct intrinsic valuation of stock the first and foremost quality, any investor must possess is the knowledge of fundamental analysis followed by emotional intelligence.

the problem arises for a beginner level of the investor when tries to value a stock and gets confused as to where to start with. we hope this article would be helpful for you to generate knowledge within yourself for the basic beginning of valuation of the stock.

Fundamental Analysis: Intrinsic Value Of A Stock

FACE VALUE (FV):

the nominal price of a share is known as its face value. the equity capital (capital generated by the company by owners) of a company is calculated by multiplying the number of shares issued by its face value.

shares issued to the investor at the face value or a price higher (premium) than the face value, or a price lower(discount) than the face value. the face value of a company only changes if and only if a company splits or consolidates( makes stronger) its shares.

in such cases, the face value of the company’s share would reduce (in terms of splits) or increase (in case of consolidation). the face value of the share is important for calculating the dividend payable on a share. when the dividend is mentioned as a percentage, that percentage is recognized by its face value.

let us understand the equity capital, change in face value, and dividend on face value with the help of an example-

EQUITY CAPITAL: in case a company has issued 1 lakh shares with a face value of Rs.10, then the equity capital of the company would be Rs.10lakhs ( 1lakh*10)

CHANGE IN FACE VALUE: if an investor holds 1 share of Rs.10 face value and the company decides to split its one share into five, then the new face value of its share would be Rs.2 and the following investor would hold 5 such shares.

DIVIDEND ON FACE VALUE: if a company has Rs.10 face value and declares 35% of the dividend, it means a dividend of Rs.3.5 per share.

MARKET VALUE (MV):

this is the market price of the share. the market value of the entire equity of a company is termed market capitalization and is calculated as the market price per share multiplied by the total number of outstanding shares.

the market value depends upon many many factors such as the performance of the company, market sentiments and liquidity, and many others.

BOOK VALUE (BV):

the book value of the company is generally the net worth of the company. to calculate the book value per share, the net worth of the company is divided by the number of outstanding shares.

the book value is the estimated amount of money each share would get if the company gets winded up.

MARKET CAPITALIZATION (MARKET CAP)

market cap is the amount of money required to buy the entire company at its current market price. there are different categories of market capital with respect to the indexing of stocks.

the are no specific size -cuts to measure the large-cap, mid-cap, and small-cap – they are calculated with respect to indexing, such as top 50-100 stocks by market capitalization as large-cap, 200-500 stocks by market capitalization are known as mid-cap, and all other remaining stocks are recommended as small caps.

INTRINSIC VALUE OF A STOCK

the intrinsic value of a stock or an asset is measured by -the free cash flow- generated by the asset. warren buffet defines intrinsic value in the best way possible that is ” IT IS THE DISCOUNTED VALUE OF THE CASH THAT CAN BE TAKEN OUT OF A BUSINESS DURING ITS REMAINING LIFE ”

in simple terms, the intrinsic value of a stock is the discount value of its future benefits to the specified investors. investing in stocks is all about estimating and valuing the stock by its intrinsic value and paying the price today with respect to its future variations and statistics.

the process of valuation is not fixed for all shares since different stocks belongs to different industry and have different evaluating terms and conditions, well specifically it depends upon individual investors, based upon the consideration of the stock or how they value the business.

MARKET VALUE VS INTRINSIC VALUE OF STOCK

If the intrinsic value is perceived to be more than the market value, then this junction is considered to be undervalued. if the intrinsic value of a stock is less than the market value then the stock is said to be overvalued.

the basic goal for an investor is to invest in undervalued stock and sell the overvalued one (theoretically). in order to generate these evaluations, an investor must be very disciplined with the statistics and understanding of intrinsic valuation.

ROLE OF BASIC RESEARCH FOR INTRINSIC VALUE OF STOCK

the role of research in finding an intrinsic value of a stock, the analysis process consists of two parts the research analysis and fundamental analysis.

while analysis involves analyzing all the available information to arrive at conclusion, research involves obtaining all necessary information.

for instance, a company’s annual report may be a map of the golden city of a company. however, obtaining thorough insights into the company’s business and profitability involves very detailed scrutiny of annual reports. and often, information in annual reports is not adequate.

given that the annual reports are published once every year, the information contained in an annual report starts becoming dated with the passage of time. Further, several information pertaining to industry conditions or the broader economy may not be covered in depth in the company’s filings.

It is, however very important that the research work of the analyst should not involve collating insider information. Insider information, in this context, refers to any price-sensitive information about a company that is not available to the public at large.

To watch more on the intrinsic value of a stock by famous investor warren buffet please visit here:

https://youtu.be/TmWW7tsCuGQ

Now let us understand the future of stock market so that we can make decisions accordingly.

STOCK MARKET FUTURE ?

When it comes to the ladder of investing in the stock market it verbally depends upon the segments of the market which are driven by emotion ( which is commonly energy in motion ) typical human psychology rating the losses in the market just by not understanding what to do ?

Moving on to the history of stock markets we have to move to the phase where all of these started back in the Amsterdam stock exchange in 1602, the typical Netherlands confronting their starts in moving forward with their innovations and inventions propagating human life to their peak form.

We understood the variation of demand and the rise of capitalism which gave rise to the scientific revolution ( 1500-1600), the first industrial revolution (1700-1800), the enlightenment, and the age of revolutions (1600-1700) then comes the very strategic Napoleonic war (1803-1815) followed by the invention of communism (1848).

That brings us to the 20th century when the stock market was very popular in America( 1900- till date) people started investing and prolonged theory continued and even today although there are rising powers like China, India they are evaluating their innovations at a very high rate even upon the dependency of the stock market and other respective inventions.

But as we consider the dramatics of our country India only 5-10% of the population among 200 cr. is interested in the stock market, the reason being we are never been taught in school or college our in society to think and make a culture of money or be it money consciousness, students and teachers pursuing and teaching in high school, college and higher universities are not been taught to make a flow culture of financial education which makes them dipped into the market and gives a boundary to innovation.

” 95% OF COLLEGE GRADUATES DOESN’T EVEN KNOW WHAT A FINANCIAL STATEMENT IS” ~ ROBERT. T . KIYOSAKI (statement valid for all over the world )

By none of any reason, the stock market will be highly influenced in the future and it has been now due to the rise of capitalism and continuity to innovation, so for an average person I might be seen that the stock market might not last for long but for most of the cases it’s not true, with the emerging new filed variants and its strategy it just provides the proof that it will last for the very long tenure in future.

Momentarily in India, we have two exchanges of the stock market the BSE ( Bombay stock exchange ) and NSE ( Nifty stock exchange ) in BSE there are approximately 6000 companies and on NSE there are 1600 companies listed, in India unlike other stock exchanges one common stock can be listed in NSE and BSE and no fraction of shares can be bought.

understanding the stock market in more deep detail must require more self-study and proper investigation regarding the material of finances.

SOME BOOKS WHICH YOU CAN GO THROUGH TO UNDERSTAND FINANCE AND THE STOCK MARKET:-

  • For a very basic solid foundation of finance please follow ” RICH DAD POOR DAD” – BY ROBERT .T. KIYOSAKI – This book gives you a solid infrastructure of how important financial education is.
  • For more clear knowledge on finance follow ” MONEY MASTER THE GAME ” – TONY ROBBINS- This will give you a complete guide that how a person even with very minimum income can become wealthy with respect to time, in this book author explains all the financial disruptions and contradictions that come to a mind of a normal person, and how to tackle and solve it.
  • If u want to understand more about finance especially the stock market and you can move on to the book of PETER LYNCH -” LEARN TO EARN ” – HERE AUTHOR VERY SIMPLY EXPLAINS ABOUT THE CRITERIA OF STOCK MARKET AND BASICS OF ANALYSIS.
  • TO step into the next gear you can progress with ” ONE UP ON WALL STREET” – BY PETER LYNCH
  • Finally, if you want to move with the greater consultancy of value investing you can follow the ” INTELLIGENT INVESTOR ” – BENJAMIN GRAHAM.

With the complete study of these few books, you will get a clear idea that why we must focus on finance and keep encouraging everyone about financial knowledge.

well if you are confused to invest in the market or want to gather a few bucks setup please visit www.bridgenile.com

53 thoughts on “How to calculate intrinsic value of a stock according to the Billionaires”
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