What Is Full Value?
Full value is a term used to describe an asset trading at a fair price. Full value is reached when the calculated value of an asset, its intrinsic value, is the same as its market value, the price at which it can be bought or sold on the open market.
- An asset is said to have reached full value when its intrinsic value is equal to its market price.
- When an asset has reached full valuation, it is said to be neither over- or undervalued.
- The market is generally inefficient, meaning that perceived valuations of assets often differ from how much they trade for on the open market.
- Professional investors may disagree as to the point at which full value is actually reached given differing estimates of intrinsic value.
Understanding Full Value
According to the efficient market hypothesis (EMH), the market value of an asset should always equal its true intrinsic value. In reality, for a variety of reasons, assets rarely trade at their full value.
That explains why the expression “buy low, sell high” is bandied around so often. Value investors believe there are plenty of underestimated companies out there that can be bought below their intrinsic value. The idea is that purchasing overlooked stocks will yield greater returns over the long haul as other investors will gradually begin to recognize their merits, pushing up their share prices to reflect their true worth (full value), or, even better, maybe overvaluing them.
Often, the market's valuation of an asset differs from the intrinsic value of the asset.
When an asset has reached full valuation, it is said to be neither over- nor undervalued. Portfolio managers and analysts often watch for full valuation as an indication of an appropriate time to sell an asset, although professional investors may disagree as to the point at which full value is actually reached given differing estimates of intrinsic value.
Full Value Method
Fundamental analysis is most commonly used by analysts to determine the intrinsic value of an asset, such as a stock, and whether it is trading at its full value. Fundamental analysts study anything that can affect an asset's value, including economic and industry conditions, the state of a company's finances, and the effectiveness and track record of its management team.
The end goal of fundamental analysis is to produce a quantitative value that an investor can compare with a security's current market price.
Cash Is King
Often, analysts will focus on cash to determine a company’s intrinsic value. One method that is particularly popular is calculating discounted cash flow (DCF).
In short, DCF analysis seeks to figure out the value of a company today, based on projections of how much cash flow it will generate in the future. The goal is to estimate the money an investor would receive from an investment, adjusted for the time value of money.
Limitations of Full Value
Due to the countless variables involved in determining intrinsic value, including the tricky process of valuing intangible assets, estimates of intrinsic value can vary between analysts. A lack of consensus consequently makes it impossible to establish if an asset is trading at the right market price or not.
Different intrinsic valuations can also be reached because not all investors have the same access to data on a given asset. Their interpretation of the asset's value will inform their decision on what it is worth, and what they are willing to pay for it, on the open market. Taken as a whole, all of these investors' actions will affect the market valuation of the asset.
Supply and demand, too, may play a role in setting a market price. If investors as a whole determine that a stock is an attractive investment, but the number of shares are insufficient to meet all of their demand for the stock, the stock price may rise, even farther than the intrinsic value of the stock.
Additionally, market sentiment can have an influence on market price. For example, idle gossip about a company can destroy its share price, leading it to trade way below its actual intrinsic value.