Answer to Question #21181 in Microeconomics for kalid muktar
what is the difference of intrinsic value and market price
Financial investments are characterized by indicators such as market price (P), internal (theoretical or estimated) value (V), yield (rate of return). The value of the market price and the intrinsic value is often not the same, because each investor has their own views on the intrinsic value of a stock, relying on their subjective expectations and the results of his analysis. The market price – is a declared figure that objectively exists in the market. Price of a stock is reflected in the relevant quotations and called coursework price. At any given time in the market, there is only one price for a given financial instrument. The internal value of financial investments - is estimated, so it depends on the analytical model, based on which calculations are carried out. As a result, at any given time stock can have several meanings of intrinsic value, and theoretically this number equals the number of market participants who use different models. Hence, the estimate of intrinsic value is somewhat subjective. In an analysis of the ratio of market price and the intrinsic value is determined by the feasibility of various management decisions on particular securities. If the intrinsic value of a stock that its estimated potential investor is higher than the current market price, then the paper profitable at the moment to buy because it underestimated the market. If the terms of a particular participant market price of a security exceeds its intrinsic value, it makes no sense to buy a paper because its price too high. However, this value and the value indicates that it is profitable to sell when it is already in the portfolio investor. If the market price and the intrinsic value of the stock are the same, it means that the speculative nature of the operation (in order to obtain income from the difference between the sale and purchase) is unlikely.