Stockholders expect to be compensated for their investment in a firms shares through periodic dividends and capital gains. Investors purchase shares when they feel they are undervalued and sell them when they believe they are overvalued.

Outside investors, corporate insiders, and analysts use a variety of approaches to estimate a stocks intrinsic value (P₀). In equilibrium, we assume that a stocks price equals its intrinsic value. Outsiders estimate the intrinsic value to help determine which stocks are attractive to buy and/or sell. Stocks with a price below (above) their intrinsic value are undervalued (overvalued). This is the essence of value investing.