Difference Between Fair Value vs Market Value
Fair value is the most commonly used phrase when it comes to conducting a valuation of an asset. Fair value can be termed as that value by which an asset is exchanged hands between the 2 parties. This can be more likely to be traced with the fair value of a stock or the share price. In other words, the fair value of an asset is the amount that is paid in a transaction between parties involved if it is sold in the open market. A willing seller and buyer should have agreed upon this value. On another hand, the market value of an asset or any other thing can be termed as that value in which the market is made for an asset. Market value is the value of the company which is calculated from its current market price or the stock price, and the same would rarely reflect the actual current value of a company because the market value will reflect demand and supply in the investing market and how eager (or not) the investors are for participating in the company’s future.
Head To Head Comparison Between Fair Value vs Market Value (Infographics)
Below is the top 4 difference between Fair Value vs Market Value
Key Differences Between Fair Value vs Market Value
Both Fair Value vs Market Value are popular choices in the market; let us discuss some of the major Difference Between Fair Value vs Market Value.
- The key and the major difference between Fair Value vs Market Value is that market value is not an appropriate method for judging the truth or the intrinsic value of an asset it’s because the market value will be highly dependent on the market forces of the supply and the demand which is again very fluctuating and is also very dynamic in nature. On the contrary, fair value will not be dependent upon the market forces of any supply and demand and will be purely dependent on what will be the true value or the intrinsic value of the asset.
- Another major and key difference between Fair Value vs Market Value is that the fair value of an asset will always be adjusted for an impairment (when the value goes down) which is due on the asset and the same can be used to arrive at the intrinsic value or the true value of the asset. On another hand, the market value is the value that can be simply determined or can be arrived at by the 2 parties that are involved in the transaction, and when they meet and post their negotiation, they will arrive at a final price or the deal price which will not always be logically driven, and they are in most of the cases irrational in nature.
- The model of the fair value in most of the cases is often the fundamental valuation of an asset of the company etc. model. The fundamental value of an asset is known as the fair value and what should the asset actually worth. Market value is the value that can be decided by the market and its forces, and the same is not derived through the fundamental method.
Fair Value vs Market Value Comparison Table
Below is the topmost comparison between Fair Value vs Market Value
| The Basis Of Comparisons Between Fair Value vs Market Value |
Fair Value |
Market Value |
| Basic Definition | Fair value can be referred to as the actual worth of an asset that will be derived fundamentally by using mathematical methods like discounted cash flow method etc. and which cannot be determined by any of the factors of the market forces. | Market value can be solely determined by the market forces or the factors of the supply and demand, and it is the value that is not determined fundamentally, of an asset. |
| Commonly used | Fair value is the most commonly used in the stock market instead of any other valuation method. As in the fair value, there will be an accurate in the valuation of an asset and will reflect a true measure of the method. | Market value is not used as commonly valuation method, and the same is used by most of the companies due to its loopholes, limitations, and shortcomings. |
| Price Consistency | The fair value of an asset mostly remains the one and the same, and it will not fluctuate more frequently when one compares the former to the market value. | Market value can be determined by the demand, and the supply, which is the market forces, and the same often tends to fluctuate more. |
| Global acceptance | Fair value is the globally acceptable measure and is also accepted in international standards like the IFRS and the GAAP. | Market Value is a kind of valuation method which is generally not frequently used and is neither accepted globally. |
Conclusion
Understanding the key and the major differences between Fair Value vs Market Value is really very important, especially when one is in the valuation industry, which is mostly the brokerage firms or the investment banking industry.
A valuation firm may be an investment bank as well and they will try to perform a valuation of an asset through several methods and will then decide which value will be a close fit for that asset so as to sell the same at a price that will justify and will correctly depict the value of the asset. Often for some of the asset where there is no open market which can help in determining the fair value or the intrinsic value of an asset often becomes costly and difficult.
However, besides that, there are certain minor shortcomings in the fair valuation or intrinsic valuation methodology which supersedes the other valuation methodology, and the same will be usually considered as one of the best practices in the industry.
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