a. Intrinsic value or the fundamental value is the real value of the company or an asset, derived after considering all the factors, both tangible and intangible, that may affect its value. It is usually the fair value of the net total assets of the company.
b. The market value, on the other hand, is the value of the shares or the assets that it would fetch if sold in the market. It is the value, as perceived by the market forces and its participants.
c. The main aim of the analysts while considering the intrinsic and the market value is to identify the mispriced securities and make profits due to such market imperfections.
d. The mispriced securities can be identified as follows:
i. If the intrinsic value of a security is significantly lower than its market value, the security is called ‘overpriced’.
ii. If the intrinsic value is equal to the market price or is within the range of 10%-20% below or above the market value, it is considered ‘fairly priced’.
iii. And, if the intrinsic value is significantly above the market value, the security is considered as ‘underpriced’.
e. The degree of market perfection/imperfection depends upon the level of confidence of inputs and the expected timeframe of convergence of intrinsic value and the market value.