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The concepts behind finance and investing can be very complex to most people. Often, looking at your portfolio can prove challenging to the average investor. The numbers shown can mislead those without the right know-how to read financial statements properly. As a firm with the heart of a teacher, our goal is to help teach those to properly understand what is going on with their finances. This article is intended to help readers understand a key financial concept – market value vs. intrinsic value- which will ultimately provide a better understanding of your financial statements.

What is Intrinsic Value?

Intrinsic value is the real value associated with something. For example, stock ABC could be trading for $50, but that does not mean that is its intrinsic value or actual worth. Intrinsic value considers much more, including future cash flow, financial statements, intangible assets, etc. So, the market value of stock ABC could be $50, but the intrinsic value of that stock could be more or less based upon several factors.

What is Market Value?

Market value is how much something is worth in the market. From our previous example, stock ABC’s market value would be $50 because that is what it is trading for. Market value could almost be seen as the public opinion of a stock.

Real World Scenarios

Market and intrinsic value do not apply only to stocks. Another example of how to understand the difference could be with cars. Say there is a 1966 Mustang for sale, selling for only $1,000 due to many internal issues causing it not to start. The market value of that car is $1,000 since that is what it is currently selling for. However, some could see that the car could be fixed up and turned into a good-looking classic car, which would boost its market value significantly. This would factor into the car’s intrinsic value. Although the car is only selling for $1,000 currently, its intrinsic value is much higher than that since it has the potential to be worth more.

A real-world application of the difference can be seen with what happened to GameStop’s stock (GME). In 2021, investors drove prices to a record high of $347.51 to counteract hedge funds who thought the company was doing poorly and that the price would soon reflect that. The market value at that time would be $347.51 per share, but in reality, the intrinsic value of a share would be much less than that, as the company’s true value was not worth $347.51 per share.

Often, the easiest place to see the difference between market and intrinsic values is fixed income, especially on a cost basis. The cost basis usually reflects the market value of the fixed income. If you were to sell a fixed income before maturity, you would not get back nearly as much as you put in. As you approach maturity, the market value of the fixed income will rise since it will be worth more in the market, but the intrinsic value will remain the same. The intrinsic value of the fixed income would consider the return, the principal, and the time until maturity. Because of this difference between market and intrinsic value, fixed income can often look like it is worth much less than it actually is from a cost-based point of view. However, that is not the case since it is intrinsically worth more than the market value reflects.

Working with an advisor

Understanding investment terms can be difficult and confusing if it isn’t your daily world. Our team of advisors tries to help you feel comfortable with investing and feel informed. If you want to hear more about intrinsic vs market value, one of our advisors would be happy to discuss it with you! Click HERE to schedule a meeting!

Intrinsic Value vs. Market Value – What Do They Mean?

November 30, 2023

David Gearhart

Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm.  The information presented is for educational purposes only and intended for a broad audience.  The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed.  Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner. 

Whitaker-Myers Wealth Managers is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed. 

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

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