Based on our general definition for market value, the market value of a security is the market price of the security. For an actively traded security, it would be the last reported price at which the security was sold. For an inactively traded security, an estimated market price would be needed.
The intrinsic value of a security, on the other hand, is what the price of a security should be if properly priced based on all factors bearing on valuation - assets, earnings, future prospects, management, and so on. In short, the intrinsic value of a security is its economic value. If markets are reasonably efficient and informed, the current market price of a security should fluctuate closely around its intrinsic value.
The valuation approach taken in this chapter is one of determining a security's intrinsic value - what the security ought to be worth based on hard facts. This value is the present value of the cash-flow stream provided to the investor, discounted at a required rate of return appropriate for the risk involved. With this general valuation concept in mind, we are now able to explore in more detail the valuation of specific types of securities.