Lesson 2.1

Value Trading

Intrinsic Value

• The actual value of the company
• May not be the same as the market value
• Subjective to each individual investor
• Calculate through formulas (e.g. DDM, GGM, , RMI, etc)
• value of stocks = DIV1/(r+1)^1+DIV2/(r+1)^2...+DIVn/(r+1)^n

Undervalued Stocks

• Stocks being traded for less than their intrinsic value
• CAUTION
• Undervalued Stocks
• DOES NOT EQUAL
• Company running into issues 

Concept

• Market value is not always accurate
• Market fluctuates too much

Margin of Safety

• Trade is significantly below its intrinsic value
• Important: Intrinsic is lower than expected
• Example:
• Market Value = $7.50  
• Estimated = $10     Intrinsic = $9

Break-Up Value

• Sum of divisions if broken up
• Cause: Difficulties, Overreations
• Undervalued = Trading below break up value
• Common to see stable companies being traded under BU value