What Is Current Market Value (CMV)?
Within finance, the current market value (CMV) is the approximate current resale value for a financial instrument. Just as with any other object of value, the current market value offers interested parties a price for which they can enter into a transaction. The current market value is usually taken as the closing price for listed securities or the bid price offered for over-the-counter (OTC) securities.
Understanding Current Market Value (CMV)
Current market value is generally closely related to market or financial instrument liquidity. An asset's liquidity refers to the ease with which that asset's owner can convert it from an investment to cash. An owner of a liquid asset will be able to convert it easily to cash and will receive a value for the asset equal to or very close to the current market value.
In theory, markets or assets that enjoy "high" liquidity are believed to offer reliable price estimates. That is, an investor can enter into a transaction with a fair amount of certainty an advertised price will be close to the final or closing price of a transaction.
- The current market value (CMV) gives parties interested in making a transaction the approximate current resale value for a financial instrument or asset.
- Current market value is related to an asset's liquidity, which is the ease of which an asset can be converted from an investment into cash.
- Brokerage firms use the current market value of an asset to determine if an investor's brokerage account has fallen below the required margin amount, which could then result in a margin call.
- For non-liquid assets, such as real estate, the current market value can deviate from the actual price the buyers and sellers are willing to consider to complete the transaction.
Current Market Value (CMV) and Margin Investing
Margin investing is a unique case for the use of a current market value measure. In a margin account, an investor essentially engages in owning securities purchased for a total price greater than the amount of cash in their account. The investor borrows the excess cash needed from their brokerage firm to fund the remainder of the purchase.
Due to this leveraged purchase situation, the brokerage firm periodically values the assets in the investor's brokerage account. The firm uses the current market value as the standardized price to track the change in the value of the investor's assets. If the total account value falls below the required margin amount, the brokerage will require the investor to add cash to the account or to liquidate some or all securities into cash. This is known as a margin call and represents one of the risks of trading on margin.
Current Market Value (CMV) in Real Estate
Assets on markets that are liquid will have reliable and realistic current market values, which encourages commerce and financial activity. In illiquid markets, however, current market values can deviate materially from actual prices parties are willing to transact at.
For example, someone selling a home might think the current market value for their home is close to an appraisal of neighboring comparables or "comps." In order to arrive at a value for a home, real estate appraisers frequently review sales data of recently sold homes that are comparable to the one being appraised. They look at sales of homes in the same neighborhood with the same approximate size and characteristics of the property they are valuing.
The seller may then put a price on their property based on these comps. However, real estate is a non-liquid asset, meaning it is not easily converted to cash. The seller's home could sell right away or it could take years to sell or it might not sell at all. A variety of factors could impact the seller's ability to convert the home to cash, such as a lack of potential buyers, an increase in interest rates that make homebuying less affordable, or a downturn in the economy. All of these could put into question the listed current market value of the home.