When it comes to evaluating assets, there are various methods prevalent in finance. Among those, two common ones include fair value and market value. There are several differences between both of them. However, it is crucial to understand what each of these is first.
What is Fair Value?
The fair value of an asset is an alternative method of evaluating it. Fair value represents the estimated worth of an asset or a liability. Technically, fair value is an asset’s or a liability’s worth that two market participants would pay for it in an orderly transaction. The fair value of an asset is usually agreed upon beforehand. Mostly, fair value is a common practice between companies that use fair value accounting.
Similarly, fair value is also a common term used for stocks and securities. For investors, the fair value of a stock represents its value in a publicly-traded marketplace. Therefore, the price of a stock in the stock market is its fair value. While obtaining the fair value of stocks is straightforward, it may not be the same for all assets.
What is Market Value?
The market value of an asset represents the value that the market has set for it. The role of market forces or factors in determining the market value of an asset can be vital. Similarly, the market value also depends on factors like the supply and demand of the underlying asset. Furthermore, an asset’s market value can fluctuate within a short period based on market conditions.
Market value can also refer to the estimated worth of a company, calculated from its current market or stock price. However, it does not reflect the actual real value of the company. It is because various factors play a role in determining the market price of a company.
What are the differences between Fair Value and Market Value?
There are some fundamental differences between fair value and market value. Firstly, while the fair value can help with the evaluation of the intrinsic value of an asset, the market value can’t. It is because an asset’s market value depends on market forces of supply and demand. Therefore, there will always be some fluctuations in its market value, which is dynamic.
Similarly, the fair value of an asset may include adjustments for impairment. The adjustment is critical to arriving at a given asset’s intrinsic value. In contrast, the market value does not do the same. It represents a price determined by the two parties involved in a transaction. The market value of an asset is also subject to negotiations and not always logically driven.
Lastly, fair value is often the fundamental method of evaluating an asset of a company, in most cases. It is because fair value represents the value of an asset and its actual worth. The market value may not reflect its true value and vary based on the parties involved in a transaction.
The fair value of an asset represents its true value. It is usually steadier and more consistent over time. On the other hand, the market value of an asset represents its value decided by the market. It considers various factors, such as the demand and supply of an asset. An asset’s market value can fluctuate due to the market forces involved in determining its value.