What is Market Value?

Market value is like forecasting tomorrow’s temperature…

Prediction models might give you a good idea of tomorrow’s weather, though it may not be exact. There are all sorts of variables that continuously change. Still, a meteorologist can analyze the data that's available and make educated guesses about weather forecasts, including temperature highs and lows. Likewise, financial analysts can use available information, such as the current market prices of similar assets, to estimate an asset’s market value — What an asset is worth.

An asset’s market value is the estimated price for which it'd sell in the open market (an unrestricted market with free access for buyers and sellers). Markets with high trade volumes of very similar assets provide high-quality information about their market value. For example, the stock market is generally liquid (trades occur constantly and quickly). So, the market value of a stock is relatively easy to pin down at a given time. A stock’s market value changes as investors sell and buy shares — Moving the stock price lower or higher.

But in markets where trades don’t occur as frequently (aka illiquid markets), the market value of a particular product can be harder to pin down. Think of a niche product, like those machines that compress recycled paper into fuel pellets. If a business owned one of these machines, it'd be hard to figure out its worth on the open market, because there isn’t as much data on what price others are paying. The company might need to hire a professional to come up with a justifiable market value for that asset.

In real estate, market value typically refers to the price a piece of property would likely get on the open market. But merely looking at the last sales price doesn’t necessarily offer a reasonable estimate for the market value of real estate. That’s because the real estate market fluctuates for a variety of reasons. Supply and demand, mortgage interest rates, and the state of the economy all play a part in the real estate market as a whole — which can affect the market value of individual properties at any given time.

Depending on the situation, it may make sense to hire an appraiser to estimate the market value of a piece of real estate. The appraiser might look at comparable sales in the same location and adjust for differences in quality, size, condition, and time. While an appraisal can help estimate a property’s estimated market value, it’s final sales price is up to the buyer and seller to negotiate.

Because real estate often involves extenuating circumstances, such as whether a buyer can get financing, or a buyer’s or seller’s time restraints, what a property ends up selling for is not always a reflection of it’s fair market value — The price at which a property would change hands between a buyer and seller who aren’t under any pressure to buy or sell.

Buyers and sellers decide the market price of an asset, like a stock or a piece of property; market value is an estimate of what that price will be. The market value of an asset is largely influenced by supply and demand. Generally speaking, if there's less demand for something (aka oversupply), the price falls. If there's more demand than supply of something, the price rises.

Time is another big factor. Many physical assets can decrease in value as they age due to wear and tear (aka depreciation). Your five-year old PC is not going to be worth as much as a new one. Conversely, other physical assets can increase in value over time (think of fine art, jewelry, or collectibles).

With financial assets, time and market conditions can alter market values. The market value of a bond can increase as it approaches maturity — The idea being that an investor wouldn’t sell a bond at a discount rate if they’re close to redeeming it for face value. On the other hand, changing interest rates can also influence a financial asset’s worth. For example, if interest rates rise, a bond purchased at a lower coupon rate (aka interest rate) will become less valuable in the bond market.

Then there’s risk. An investor might view a younger company as riskier than buying into an established company. But if an investment becomes less risky after buying into it, the market value of such an investment should go up. Likewise, if an investment becomes riskier, because of changing market conditions or management decisions, the market value of that asset should go down. For example, a real estate investment in a foreign country may lose value if it’s government becomes unstable.

In business, market value can apply to one of two things. It could refer to the value of the company, or the value of its assets.

There are a few ways to figure out what a company is worth. For example, the total value of all outstanding shares of public equity is one way to think about a company’s market value. In other words, that's what the financial market is willing to pay for all of the company's shares. Analysts call this the market capitalization (the number of shares times the company's stock price). Here are a few other ways you might estimate a company’s market value:

• Enterprise value: Another approach is to consider what it would take to buy a company. That's called the company's enterprise value. If you wanted to buy a company, you would have to buy both its equity and its debt. Enterprise value calculates this as its market capitalization plus its debt and minus its cash and cash equivalents. For example, let’s say a company has a market capitalization of $1M, $100K in debt, and $50K in cash. You could pay half the debt off with the $50K in cash, leaving an enterprise value of $1,050,000. Because enterprise value considers a company’s debt and cash positions, it can be a more realistic view of a company’s total value.
• Book value: The company's book value is another way to think about its market value. Book value is what equity holders would have left if a company was liquidated — Meaning it sold all its assets and used the proceeds to pay off all the debts. In some ways, that's the fair value of the company, but only if it was going out of business. Otherwise, book value misses the company's intangible assets.
• Intrinsic value: Intrinsic value is an analytical valuation method that uses the concept of net present value — Which helps you estimate the current value of a company’s future cash flows. This method is used to calculate a company’s worth today by taking into account its future potential earnings. If a company has a strong brand and a desirable product line (aka intangible assets), a company's intrinsic value could be considered its market value.

The market value of a company's assets is also important in determining the value of the company at a point in time. Companies record what they pay for long-term assets (such as loans or mortgage-backed securities) on their balance sheet. But the value of those assets can change as market conditions change. The fair market value of those assets is what they're worth on the open market today.

Companies adjust these values with each accounting period. Adjusting for these changing market values is called mark to market accounting. Mark to market accounting tries to give investors a transparent view of what a company’s assets and liabilities are worth in current market conditions.

When a company updates its financial statements, it usually adjusts the value of its fixed assets, such as Furniture, Fixtures and Equipment (FF&E), to account for depreciation (the decreasing value of an asset over its life). The depreciated value of an asset recorded in a company’s balance sheet during the accounting period is called its book value. In short, book value is the asset’s purchase price minus its accumulated depreciation.

While calculating depreciation helps approximate the declining value of an asset, it doesn’t necessarily tell you what price the asset would fetch if the company put it up for sale. That’s where fair market value comes in. For some assets, the fair market value can be determined by looking at what other assets like it are selling for. In other cases, an analyst or appraiser would need to estimate the market value.

There isn’t one formula to calculate market value, but rather different ways to estimate what an asset is worth on the open market. One way to estimate market value is by looking at recent negotiations for similar assets (aka comparable sales).

Appraisers often use comparable sales as the baseline for calculating market value. For example, let’s say you’re trying to decide the market value of a 1,500 square foot, three-bedroom home on an acre lot. You might start by looking at the sales price of a home in the same neighborhood that’s similar in size. An appraiser might then adjust for other factors, such as the year the two homes were constructed, and any differences in upkeep and size.

Calculating any other asset requires a similar process. Whether it's an antique chair, a piece of heavy equipment, or a stock certificate, the market value comes down to what a buyer would pay for it today. For assets that are bought and sold frequently on the market, like stocks, the process of estimating market value might be as simple as looking up its real-time share price on the stock exchange. Pinning down the value of an antique chair or piece of heavy equipment can be trickier, since they aren’t bought and sold as frequently, and comparable, current data may be harder to find.