Market value refers to the price that purchasers and sellers both accept as the price at which a security is traded in an open market, based on supply and demand. What investors believe a company is worth – which is calculated by multiplying the current market price of the entity’s shares by the number of shares outstanding – is known as market capitalization. The term is is also called the Market Price. It is similar, but not the same as intrinsic value.
In an inefficient market, the market value is the price both buyers and sellers would accept if they had equal access to data and were free to trade without constraints – as they wished. On a commodity or securities exchange, it is the price of the latest trade.
Put simply, market value is how much an asset would fetch in the marketplace – not only how much people would be willing to buy it for, but also a price that would satisfy sellers.
The market value of a security or asset is what both the seller and buyer agree it is worth – what one is willing to sell it for is what the other is prepared to pay for it.
Companies are valued for many reasons, such as raising additional capital, mergers and acquisition transactions, to motivate management, listing on the stock exchange, divestiture, and taxation purposes.
Determining the market value of an asset
Determining the market value of exchange-traded instruments such as futures and stocks is easy, given that their market prices are widely circulated and easily available. It is more difficult to accurately establish market values of OTC (over-the-counter) instruments such as fixed income securities.
Illiquid assets such as businesses and real estate have market values that are particularly challenging to determine. Investors usually have to consult real estate appraisers and business valuation experts.
In accounting, the term refers to the replacement cost of an item after deducting estimated carrying, delivery and selling costs from its estimated selling price. There is a difference between replacement cost and market price.
According to nasdaq.com, market value is:
“The price at which a security is trading and could presumably be purchased or sold. (2) What investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the current market price of a firm’s shares.”
The book value of a property is how much you paid for it, while its market value is how much you would get if you tried to sell it now.
The term market value is frequently used interchangeably with fair value, fair market value and open market value, although they may have distinct definitions in different standards, and may also differ in some circumstances.
The International Valuation Standards Council says that market value is the estimated amount for which a liability or asset should exchange on the valuation date between a willing seller and a willing buyer in an *arm’s length transaction, after proper marketing and where both the buyer and seller acted knowledgeably, prudently and without compulsion.
*An arm’s length transaction makes sure that the parties in a deal are acting in their own self interest and are not subject to any pressure or duress from the other party.
Dividends and market value
A good way to enhance the market value of a company and its shares is by issuing dividends to stockholders. General Electric, for example, has been doing this for decades – it regularly issues dividends to shareholders.
People know that General Electric’s pattern of giving dividends is unlikely to change, so demand for its shares are high. High demand generally means high prices.
Tech companies, on the other hand, hardly ever issue dividends – because they are so popular, extra incentives are not necessary.
Fannie Mae definition of market value
Fannie Mae (Federal National Mortgage Association), a US government-sponsored enterprise, explains that market value is the most likely price that a property should bring in an open and competitive market, under all conditions required for a fair sale, with the buyer and seller each acting prudently, knowledgeably, and assuming the price is not affected by undue stimulus.
The following conditions and circumstances are necessary for a proper market value to exist:
– both the buyer and the seller are typically motivated;
– both the buyer and the seller have been well informed or advised, and each is acting in his or her best interest;
– exposure of the property has been allowed in the open market for a reasonable amount of time;
– payment is made in terms of cash in a local currency or in terms of financial arrangements comparable to that cash; and
– “the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”
Market value versus book value
If you bought a house twenty years ago for $200,000 dollars, its book value on day one was $200,000, and still is that amount today.
Market value, however, does not remain unchanged during that twenty-year period. Market value refers to how much you would get if you sold the house at any given moment. If ten years after you bought the house – ten years ago – property prices had doubled, its market value ten years ago would have been $400,000 (200,000 doubled).
If property prices have increased threefold over the past two decades, your house’s current market value would be $600,000 (200,000 times 3).
The book value of an asset is important, especially for the tax office. It helps track profit and losses. The difference between an asset’s book and market values tells us what profit or loss has been incurred.
Video – Market value of assets
This Khan Academy video looks at the market value of the assets of a shoe company.