 ## What Is Intrinsic Value?

By knowing how to calculate the intrinsic value of investments, you can search for the best bargains in the market intrinsic value refers to an investor's perception of the inherent value of an asset, such as a company, stock, option, or real estate. Knowing an investment's intrinsic value is useful for value investors who have a goal of buying stocks and other investments at a discount to this amount. ## ​

Calculating the intrinsic value of options When it comes to valuing options, calculating intrinsic value is easy: Simply take the difference between the stock's current price and the option's strike price, then multiply by the number of shares your options entitle you to buy. Intro

#### Intrinsic Value of Stocks or Other Investments

When it comes to stocks, intrinsic value can be tougher to determine since there are multiple calculation methods that can be used. Some economists believe that intrinsic value is the present value of the business' future cash flows, while others believe that it is simply the value that is justified by the available facts.

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#### Discounted Cash Flow Analysis

Basically, discounted cash flow analysis uses the time value of money along with an estimation of a company's future cash flows. The sum of the present value of all future cash flows is the intrinsic value. There are several variables that go into this type of analysis.

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#### Asset-based Valuation

Another popular method of determining intrinsic value consists of simply adding up all of a company's assets, both tangible and intangible, and then subtracting its liabilities.

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#### Analysis Based on a Financial Metric

Many investors use metrics such as the price-to-earnings (P/E) ratio in order to assess intrinsic value. For example, if the average S&P 500 component trades for 15 times earnings, a stock that trades for just 12 times earnings could be viewed as undervalued. This is the least scientific method, and is generally used in combination with other factors.

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