Learn a simple formula to identify undervalued or overvalued shares before making any investment decision
When you buy a product, you often ask if it’s value for money. But do you apply the same thinking when buying stocks? Most people don’t. The stock market shows the price at which people are willing to buy or sell a stock, but this doesn’t always reflect the stock’s actual worth. That true worth is called its intrinsic value—a concept every investor must understand before buying.
What Is Intrinsic Value and Why It Matters Intrinsic value refers to what a stock is genuinely worth, not just what it sells for in the market. It answers a key question: is this stock worth buying at this price? If the market price is higher than the intrinsic value, the stock is considered overvalued. If lower, it’s undervalued. This difference can help investors make informed decisions rather than relying on hype or trends.
A simple formula to calculate it You can easily estimate intrinsic value using this formula: Intrinsic Value = EPS × Fair P/E Here,
EPS means Earnings Per Share (profit a company earns per share), and Fair P/E is the reasonable price-to-earnings ratio for that company or its industry. Both values are available on the NSE’s official website.
Example: How to use this while investing Suppose a company’s EPS is ₹50 and the fair P/E is 20. Then, Intrinsic Value = 50 × 20 = ₹1000. If the stock trades at ₹1500, it’s overvalued; if under ₹1000, it’s undervalued. Always ask: is the stock’s price lower than its real worth?
7 Key Pointers:
1. Market price ≠ real value.
2. Intrinsic value reveals the stock’s true worth.
3. Use the formula: EPS × Fair P/E. 4. EPS and P/E data are available on NSE.
5. Overvalued = priced above intrinsic value.
6. Undervalued = priced below intrinsic value.
7. Wise investing begins with value, not trends.
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