Fair Value vs Market Value

Difference Between Fair Value and Market value

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.

Fair value is the most used term when it 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 assets or anything can be defined as the value that the market has made for it.

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Fair Value vs. Market Value Infographics

Let’s see the top differences between fair value vs. market value in detail.

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Key Differences

  • Market value is not an appropriate method to judge the true value of an asset as it is highly dependant on the forces of demand and supply, which is very fluctuating and is dynamic. 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 significant difference is that the fair value of the asset is always adjusted for an impairment, which is due to the asset to arrive at the true value of the asset. On the other hand, market value is the value which is determined by the two parties when they meet. After negotiation, they arrive at a deal price which is not always logically driven and are often irrational.
  • 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 worth. Market value is the value which is decided by the market and is not derived fundamentally.

Fair Value vs. Market Value 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 forces.Market 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 methodValuation MethodDiscounted cash flow, comparable company analysis, comparable transaction comps, asset valuation, and sum of parts are the five methods for valuing a company.read more. As in the fair value, there is an accuracy of the valuation of the asset and is a true measure of the method.Market 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 value.Market value as it is determined by the supply and the demand forces often tends to fluctuate.
Fair value accounting measure is globally accepted and is also accepted in the International Financial Reporting Standards (IFRS) and Generally accepted accounting principles (GAAP)The market value valuation method is the one that is generally not frequently used and is not globally acceptable.

Conclusion

Understanding the differences between the fair and the market value is significant, especially when you are in the valuation industry. A valuation firm will try to value the value of an asset through various methods 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 is usually considered as best practice in the industry.

This article has been a guide to Fair Value vs. Market Value. Here we discuss the top 4 differences between fair and market value along with infographics and comparison table. You may also have a look at the following articles –

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