How to Calculate the Intrinsic Value of a Stock?
How much are stocks worth? Almost 70% of the world's population uses algorithmic trading. You could just stick with the stock's current price. Finding the intrinsic value of the stock is an additional option. Algo trading software is prominent in investing and trading. It refers to a stock's true value, regardless of investors' opinions. Determining inherent value may seem difficult. It's not.

You can utilize a stock's intrinsic value to find out how much it is worth and the most incredible deals available. Understanding an investment's intrinsic worth is helpful, particularly if you're a value investor looking to purchase stocks or other investments at a discount.

Intrinsic Value of Online Stock Trading

Intrinsic value is crucial to online stock trading selections. A stock's intrinsic value is independent of its market price. It determines if a stock is overvalued, undervalued, or appropriately priced. The platforms offer financial data and analytical tools to assist investors in appraising stocks.

Financial data, industry trends, and research help traders determine a stock's intrinsic value. Intrinsic value helps traders find investment possibilities. If a stock's intrinsic value exceeds its market price, it may be undervalued and worth buying.

Advanced valuation algorithms and indicators let traders estimate intrinsic value on online stock trading platforms. DCF analysis, price-to-earnings (P/E) ratios, price-to-book (P/B) ratios, and other fundamental indicators are used.

Investors can use these tools to compare a stock's intrinsic value to its current market price. In conclusion,  determining a stock's intrinsic value can help online stock traders make wiser judgments. Finding investing opportunities, analyzing market prices, and making money trading are all made easier thanks to it.

Intrinsic Value of a Stock: An Overview

The intrinsic value of a stock is based on its fundamentals and prospects. It differs from the stock market price, which is determined by supply and demand. Intrinsic value can help investors identify cheap or overvalued stocks and make smarter investing decisions.

Analysts use different algorithms and assumptions to assess a stock's intrinsic value. Common ways include:

1. Discounted Cash Flow Analysis (DCF)

This method evaluates a company's lifetime free cash flows' current value. After paying operating and capital expenses, a corporation has free cash flow. DCF formula:

Discounted Cash Flow (DCF) = Summation of (Cash Flow for period t / (1 + discount rate)^t)


  • Company free cash flow in year t (FCFt) is estimated.
  • The stock's needed rate of return (DR) represents its risk and opportunity cost.
  • Terminal value (TV) is the predicted present value of free cash flows beyond year n, calculated using perpetual growth, exit multiple, or liquidation value.
  • Profitable, growing enterprises with predictable free cash flows can be valued using the DCF technique. Unprofitable or troubled enterprises may not be suitable for stocks with negative or erratic free cash flows.

2. Dividend Discount Model (DDM)

This method believes a stock's intrinsic value is its future dividends' present value. DDM formula:

Dividend Discount Model (DDM) = Dividend / (Required Rate of Return - Dividend Growth Rate)


  • The expected dividend per share (EDPS) is the company's projected dividend for the coming year.
  • The cost of capital equity (CCE) is the required rate of return for stock investments, reflecting risk and opportunity costs.
  • DGR is the predicted yearly dividend growth rate.
The Gordon Growth Model (GGM) of the DDM predicts dividends will grow forever. GGM formula:

Gordon Growth Model (GGM) = Dividend / (Required Rate of Return - Dividend Growth Rate)

Mature companies with reliable dividends can be valued using the DDM and GGM. However, growth and cyclical equities that do not pay dividends or have unpredictable dividend patterns may not apply.

3. Relative Valuation Method (RVM)

This strategy implies a stock's intrinsic value is its market price times a valuation multiple. A valuation multiple compares a company's earnings, sales, or book value to its market price. RVM formula: 

Relative Valuation Method (RVM) = Stock Price / Comparable Ratio


  • The company's stock market price is MPS.
  • Valuation multiples (VMs) compare a company's financial measure to its market price, such as P/E, P/S, or P/B.
  • Similar and competing equities can be valued using the RVM approach. It may not apply to niche and innovative stocks with no similar peers.

Why is Intrinsic Value Calculation Valuable in Investing?

Value investing requires stock valuation. Value investing seeks undervalued stocks. Investors use numerous methodologies to assess a stock's intrinsic value. The goal is to buy equities at a discount. Evaluating intrinsic value helps attain this goal. Investors can make informed investment decisions by determining intrinsic value.

If the intrinsic value exceeds the market price, the stock may be undervalued and offer capital appreciation. If the intrinsic value is lower than the market price, the stock may be overvalued, urging investors to be cautious or explore other investments.

In conclusion, assessing intrinsic value helps investors uncover investment opportunities and make informed decisions based on the perceived gap between a stock's market price and actual value.

Intrinsic Value with Options Trading App

In 2022, the stock trading app market was worth USD 13.6 billion; in 2023, USD 89.8 billion. Options trading relies on intrinsic value, and an app can help. Options give the right to buy or sell an underlying asset at a specific price (strike price) within a certain timeframe (expiration date). The difference between the strike and current asset prices is an options contract's intrinsic value.

Using an options trading app requires understanding the option's intrinsic value. It helps traders identify ITM, ATM, and OTM options. ITM options have positive intrinsic value, while OTM options have zero. Options traders might choose to exercise or sell options based on intrinsic value. Exercise options with high intrinsic value, but sell or expire options without inherent value.

An Options trading app gives real-time market data, pricing algorithms, and research tools to evaluate intrinsic value and measure options strategy profitability. This information helps traders choose options based on their perceived intrinsic worth, improving their trading experience and possible returns.

The Relationship Between Market Risk and Intrinsic Value

Investment decisions depend on market risk and intrinsic value. Intrinsic value helps investors analyze investment risk and return. Cash flows, growth potential, and other factors determine an investment's intrinsic value.

It establishes the under or overvaluation of security. Knowing an asset's intrinsic worth allows investors to purchase it based on risk and reward. Market risk is the turbulence and uncertainty of the market.

Stock prices and market fluctuations can be influenced by economic, geopolitical, and investor mood. Stock prices may change more when market risk is high. Investors must therefore look at the intrinsic value to ascertain whether a company is priced appropriately in relation to its fundamentals.

By contrasting intrinsic value and market risk, investors might identify opportunities associated with market volatility. A stock with a strong intrinsic value might be a wise investment during a downturn. When the intrinsic value is below the market price and the market risk is significant, it may be a sign of overvaluation and call for caution.


Investment valuation relies on stock intrinsic value. Fundamental analysis can help investors uncover value investments. Discounted cash flow analysis or comparative valuation methods like the Dividend Discount Model or Gordon Growth Model can calculate intrinsic value.

Investors must use judgment to assess intrinsic value.

If the intrinsic value surpasses the market price, the stock may be undervalued and a buying opportunity. The market price may be overvalued if the inherent value is lower.

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How to Calculate the Intrinsic Value of a Stock?
Aashutosh C 6 July, 2023
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