Intrinsic vs. Market Value

Q What's the difference between intrinsic value and market

value?

— C.B., Farmington, N.M.

A That's a critical concept for investors to understand. Imagine Acme Explosives Co. (ticker: KBOOM). Its intrinsic value is what it's really worth, based on its assets and debt, its anticipated growth rate and, ultimately, the amount of cash it's expected to generate over its lifetime. Unfortunately, that's not easy to determine, and different analysts will arrive at different numbers. Plus, things change. Acme's intrinsic value may be estimated around $5 billion. But if a competitor introduces a better explosive, Acme's future, and therefore its intrinsic value, is suddenly different.

Meanwhile, market value is what investors are willing to pay for a company. It's typically measured by calculating a company's "market capitalization." If Acme Explosives has 200 million shares outstanding and the current share price is $30, then its market cap is $6 billion (200 million times $30 is $6 billion). If a firm's intrinsic value is higher than its market value, then its stock is undervalued and attractive.

Q Must I sell my IRA stocks when I turn 70 1/2?

— E.M., Tallahassee, Fla.

A With traditional IRAs, you must begin taking distributions after you turn 70 1/2 (though due to our economic crisis, Congress is permitting us to forgo that in 2009). Your withdrawals generally will be taxable. You may need to sell some stocks in the IRA to generate the cash (though some IRAs permit distributions of shares rather than cash).

If you have a Roth IRA, there are no mandatory distributions. And if the Roth IRA is at least five years old and you're older than 59 1/2, distributions are tax-free. Learn much more about IRAs at www.fool.com/ira.

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