A:

High demand and inaccurate valuation are the two most common factors that may lead to a situation where assets trade above their market value. A wide variety of figures and considerations, such as profitability ratios, expected growth rate, market sector, financing and location, go into the determination of an asset's market value. Some of the largest difficulties in accurate determination of market value stem from the value calculations for intangible assets such as brand recognition or key personnel, items of definite but ultimately indeterminable value.

Among the dozens of valuation metrics available to investors and analysts, some of the most frequently used are price ratios, including the price-to-earnings, or P/E, and price-to-book, or P/B, ratios. For price ratios, higher numbers generally translate to higher market values. Any valuation metric is subject to dramatic fluctuations around circumstances such as recessions and economic booms, so even the timing of when a valuation measure is taken can significantly impact the calculated market value for an investment asset.

Ultimately, market values are an indication of the market's overall perception of a business’ success and likely future potential. One factor that can lead to an asset at least temporarily trading above its market value arises from strong investor enthusiasm. If investors are convinced an asset is on the verge of a significant increase in value, they purchase the asset aggressively even if it means paying a premium over current market value. The corresponding strong increase in demand and pressure on supply can easily drive the price of an asset above its commonly considered market value.

There is also the possibility a given asset's market value is simply inaccurate. Calculations of market value are not infallible pronouncements, and many investing strategies are focused on discovering hidden gems in the market, assets with a true value not yet recognized by the market. In such instances, it is not so much the case that the asset is trading above market value, but rather the actual value is not being accurately reflected in the current market value. This idea is supported by the theory of value investing, a trading strategy that focuses on accurately identifying a company's intrinsic value in relation to its current market value to determine a favorable investment entry price. Value investors understand that following popular investing trends, or blindly accepting current market valuations, is not the pathway to maximum investing profits. The market is no more perfect than the individuals acting in the market, and, therefore, values assigned by market action are not perfect either. Value investors aim to make a living through disagreeing with the basic assertion of the efficient market hypothesis of market value being an accurate assessment of true value at all times.

These are the basic reasons, such as strong investor demand or inaccurate value assessment, that can lead to an asset trading at a premium to current market value. However, investors should be aware there are a number of potential sources for such a situation arising. For example, a change in a company's management, where a company brings in an impressive executive, can be the trigger event that spurs a sudden increase in investor demand for a company's stock.

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