Market value and intrinsic value are two fundamentally different ways to analyze the value of an asset or security. Both market value and intrinsic value are useful for making investment decisions, but market value has distinct advantages over intrinsic value in certain situations. Short-term securities traders can especially benefit from analyzing market value over intrinsic value, but the advantages can extend to almost anyone wishing to buy or sell an asset on a secondary market.
Market Value vs. Intrinsic Value
Simply put, the market value of an asset represents the amount that potential buyers are willing to pay for it on an open market. Intrinsic value, on the other hand, represents the true underlying value of an asset. Market values change on a regular basis, whereas intrinsic value tends to remain relatively constant, experiencing gradual, long-term shifts rather than sharp frequent value swings.
Market value has a major advantage over intrinsic value when analyzing stocks, bonds and other tradable securities since it provides insight into what an investor can expect to receive from selling an asset. If a company's earnings-per-share value (a measure of intrinsic value) is $25 per share, that doesn't tell investors anything about the current, up-to-the-minute profit potential of the stocks they hold. Knowing a stock's market value allows traders to time buy and sell decisions to make short-term profits. This principle also applies to physical assets. Consider real estate, for example. It can be more useful for a real-estate investor to know how much he can sell a house for on the market today, rather than understanding the underlying value of its structural improvements, design and other intrinsic-value factors.
Productive assets have finite useful lives, after which time they must be replaced. Analyzing the steadily decreasing market value of capital equipment such as machinery and vehicles can give managers insight into the ideal times to replace assets. The intrinsic value of a truck is not likely to drop much over its life, for example, while the market value will drop significantly each year. When a truck reaches the point where it has a negligible market value, this can be a signal that there are more efficient, more powerful trucks on the market, which may in turn be a sign that it is time to upgrade to a newer vehicle.
The concept of market value is what actually allows day-trading investors to earn a living. Without secondary markets for assets and securities, there would be virtually no opportunity to make a living trading stocks, bonds, real estate or any security. Maintaining secondary trading markets with ever-changing market values set by traders' daily activities increases stability and employment in the economy, driving entrepreneurship and investment in the financial sector.
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