What is the fair value of shares

Fair value of the stock is a subjective term that is calculated using the current financial statements, market position and possible growth value from a set of metrics, whereas the market value is the current share price at which the stock or asset is being traded at.

Difference Between Fair and Market value

Fair value is the most used term when comes to valuing an asset. Fair value can be best defined as the value by which an asset changes hands between two parties. It is more likely traced with the fair value of a share price. On the other hand, the market value of an asset or anything is simply can be defined as the value that the market is made for an asset

Fair Value vs Market Value Infographics

Key Differences Between Fair and Market Value

  • Market value is not an appropriate method to judge the true value of an asset as market value is highly dependant on the forces of demand and supply which is very fluctuating and is dynamic in nature. On the contrary fair value is not dependant on the forces of any demand and supply and is purely dependant on what is the true value of the asset
  • Another major difference is that the fair value of an asset is always adjusted for an impairment which is due to the asset in order to arrive at the true value of the asset. On the other hand market value is the value which is simply determined by the two parties when they meet and after negotiation, they arrive at a deal price which is not always logically driven and are often irrational in nature
  • The model of fair value is often the model of the fundamental valuation of an asset or a company etc. The fundamental value of an asset is known as the fair value and what should the asset actually worth. Market value is the value which is decided by the market and is not derived fundamentally

Comparative Table

Fair ValueMarket Value
Fair value refers to the actual worth of asset which is derived fundamentally and is not determined by the factors of any market forcesMarket value is solely determined by the factors of the demand and supply and it is the value which is not determined by the fundamental of an asset
Fair value is most commonly used in the market instead of any other valuation method. As in the fair value, there is an accuracy of valuation of the asset and is a true measure of the methodMarket value is not the most common valuation method which is used by the companies due to its shortcomings and limitations
The fair value of an asset often remains the same and it does not fluctuate more frequently when compared to the market valueMarket value as it is determined by the supply and the demand forces often tends to fluctuate
Fair value is a measure which is globally accepted and is also accepted in the International Financial Reporting Standards (IFRS) and Generally accepted accounting principles (GAAP)Market Value valuation method is the one which is generally not frequently used and is not globally acceptable

Conclusion

Understanding the differences between the fair and the market value is very important especially when you are in a valuation industry. A valuation firm will try to value the value of an asset through various methods in order to decide which value is a close fit for the asset to sell it at a price that correctly reflects the value of the asset.

Often for an asset where there is no open market determining the fair value of the asset often becomes difficult and costly. However, besides its minor shortcomings, the fair valuation methodology supersedes the other valuation methods and it usually considered as best practice in the industry.

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Filed Under: Valuation, Valuation Principles