What is Market Value?
Market value is the price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization of a publicly traded company, and is obtained by multiplying the number of its outstanding shares by the current share price. Market value is easiest to determine for exchange-traded instruments such as stocks and futures, since their market prices are widely disseminated and easily available, but is a little more challenging to ascertain for over-the-counter instruments like fixed income securities. However, the greatest difficulty in determining market value lies in estimating the value of illiquid assets like real estate and businesses, which may necessitate the use of real estate appraisers and business valuation experts respectively.
Understanding Market Value
A company’s market value is a good indication of investors’ perceptions about its business prospects. The range of market values in the marketplace is enormous, ranging from less than $1 million for the smallest companies to hundreds of billions for the world’s biggest and most successful companies.
Market value is determined by the valuations or multiples accorded by investors to companies, such as price-to-sales, price-to-earnings, enterprise value-to-EBITDA, and so on. The higher the valuations, the greater the market value.
- Market value is the price an asset fetches in the market and is commonly used to refer to market capitalization.
- Market values are dynamic in nature because they depend on an assortment of factors, from physical operating conditions to economic climate to the dynamics of demand and supply.
The Dynamic Nature of Market Values
Market value can fluctuate a great deal over periods of time and is substantially influenced by the business cycle. Market values plunge during the bear markets that accompany recessions and rise during the bull markets that happen during economic expansions.
Market value is also dependent on numerous other factors, such as the sector in which the company operates, its profitability, debt load and the broad market environment. For example, Company X and Company B may both have $100 million in annual sales, but if X is a fast-growing technology firm while B is a stodgy retailer, X’s market value will generally be significantly higher than that of Company B.
In the example above, Company X may be trading at a sales multiple of 5, which would give it a market value of $500 million, while Company B may be trading at a sales multiple of 2, which would give it a market value of $200 million.
Market value for a firm may diverge significantly from book value or shareholders’ equity. A stock would generally be considered undervalued if its market value is well below book value, which means the stock is trading at a deep discount to book value per share. This does not imply that a stock is overvalued if it is trading at a premium to book value, as this again depends on the sector and the extent of the premium in relation to the stock’s peers.