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What is Intrinsic Value?

2016-12-08T13:48:02+00:00

The term 'Intrinsic Value' is included in the Economics edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Intrinsic value has several meanings where finance and business are concerned. The first of these meanings pertains to companies and their underlying stock issues. An intrinsic value of a stock could be said to be the actual per share value of a stock, in contrast to its book value or price according to the stock market.

Intrinsic value takes many other elements into account, such as trademarks and copyrights owned, as well as the value of the brand name. These factors are intangible in nature. This makes it hard to figure out their true worth, although it can be done. As a result of this, such items of intrinsic value are not commonly included in the stock’s actual market price.

A different way of understanding intrinsic value is that the intrinsic value is the amount that a company is actually worth. Market capitalization on the other hand is the price that investors will willingly pay for a company at any given point. Intrinsic value can be calculated in varying ways, depending on the investor who is doing the calculation.

Intrinsic value is also the amount of money that a call or put option on a stock is in the money. Call options give investors the right but not the obligation to buy a stock at a certain price, while put options grant investors the right but not obligation to sell a stock at a particular price. Figuring up a call option’s intrinsic value is done by simply taking the difference of the call option’s strike price and subtracted from the actual price of the underlying stock.

As an example, a call option might have a strike price of $40. The stock that this option is based on could be worth $55 per share. This would give the option an intrinsic value of $15 each share, or $1,500 since stock options represent a hundred shares. Stock prices that prove to be lower than call options do not possess any intrinsic value.

Put option intrinsic values are found by taking the difference of the strike price of the put option and subtracting the price of the stock that underlies them. As an example, should a put option contain a strike price of $30, and the stock be trading at only $25, then the put option will have an intrinsic value of $5 per share, or $500 for the one hundred share option. On the other hand, if the stock market price turned out to be higher than the strike price of this put option, then the option would not contain any intrinsic value.

Intrinsic value is also the true, real worth of an asset or object. Gold and silver have intrinsic value in that people will pay you for them at any time and in any country. Conversely, paper currencies may only be said to have intrinsic value if they are linked to or backed up by a hard asset.

The term 'Intrinsic Value' is included in the Economics edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.