Key takeaways
- Market value can refer to the value of an asset, stock share, or the overall value of an entire company.
- Market value is only a realistic figure in a fair market.
- When you can calculate market value, you have a tool to use to help guide investments, purchases and negotiations.
Market value is a term that's used in a variety of financial scenarios, including investing and real estate. Understanding the market value definition can help you make more informed choices as you save for retirement, invest or work on buying your next home.
Market value is the agreed price of a good, service or another type of asset. It can also be used as a financial measure of the value of a company.
Another term for this concept is fair market value. The "fair" part is important because you can only arrive at a market price that reflects market value when the market in question is "fair" or stable. If there is distress on either the seller or buyer side of the equation, the fair market value doesn't always come into play.
For example, consider the example of tree removal services in an area that has been hit hard by a hurricane. The fair market value for tree removal services might normally be $100 per hour. But in a case where the market is stressed by demand that outpaces supply, the actual market price might be much more.
What is an example of market value?
Because market value can refer to several things, let's look at a few examples to understand its meaning in different scenarios.
The market value of a company
The market value of a company refers to the total value of all shares on the market. For example, say there are a total of 50,000 shares of XYZ App company on the market today. Those shares are trading for $75 per share. In that case, the market value of XYZ App company would be $3.75 million. This is also known as the market capitalization of the company.
The market value of a stock
The market value of a specific stock refers to how much investors (or the market) as a whole agree the stock is worth. You can usually see the market value reflected in what the stock is trading for on average. But remember that fair market conditions need to be prevalent. In cases where there is distress in the market, when there isn't enough time for buyers and sellers to contemplate the values or someone is forced into buying or selling, the market is not operating under fair conditions.
Here's an example of the market value of a stock. As of April 24, 2023, Apple was trading at $164.061 per share on average. At that time, there wasn't any sort of distress or other issue surrounding this market to make it especially unfair. So, the market value of the stock could be said to be around $164.
The market value of a stock can be important for someone who is approaching retirement, especially if their benefits include stock from their employer. In this case, they would want to keep an eye on market values so they know what their benefits may be worth.
The market value of a car
The market value of real property can be harder to determine. There isn't a trading market you can look at to see the average of hundreds of transactions. However, there are resources you can consider.
For example, Kelly Blue Book offers a valuation wizard that asks questions about the make, model, options and state of your vehicle. It uses data from the market to try to estimate the market value of the vehicle. A 2020 Blue Dodge Durango with the GT Sport Utility 4D package and standard options in good condition, for example, has a market value of between $19,000 and $21,700, according to Kelly Blue Book.2
With real property, the difference between the market value and the selling price can be substantial, depending on all types of factors. If you find someone who just really wants a blue Dodge Durango, for example, they may be willing to pay more. It all comes down to the desirability of the property to the potential buyer.
How is market value calculated?
The market value of an individual asset doesn't need to be calculated. If the asset trades in a financial market, you can simply research the average price right now. If the asset is real property, you may need to use an online valuation tool or get it appraised by a professional who will consider the market in calculating the total value.
To calculate the market value of a public company, you multiply the share value by the total number of shares. For example:
- Imaginary SaaS company SoftwareIT's stock is going for $50 per share.
- There are 100,000 total shares.
- The market value of the company, or market capitalization, is $5 million.
Many companies don't have shares because they aren't publicly traded. In this case, you can estimate market value in the same way you might calculate it for a car or home. You can compare the business to similar businesses in the same industry.
Another way to calculate the market value of a company is to use the price-to-earnings ratio, or P/E Ratio. You take the annual profit of the business and multiply it by a multiple that's determined based on factors such as the size of the business, its industry and growth potential. Multiples can range between three and five commonly for small companies and can range much higher for larger companies or those that are publicly traded.
Importance of market value
Market value helps determine what an asset is worth. Because the market value is agreed upon by the market in general, which includes both buyers and sellers, it helps facilitate trades and transactions.
Understanding the market value of a company can also be important to investors who are looking to invest in healthy, growing businesses.
What is the market value of a property?
Market value is also important in real estate. It helps you know what you might be able to sell your home for or how much you might expect to pay for a piece of property. Starting with the market value also provides buyers and sellers with a shared understanding of value that they can begin negotiations from.
The market value of a home is typically determined by an appraisal. A professional appraiser looks at many factors of the property when coming up with a value, including:
- Its age and condition
- The amount of land
- The size of the home or other building
- How many bedrooms and bathrooms are in the home
- Upgrades and amenities, such as granite countertops or a pool
- What similar homes in the area are selling for
It's important to remember that when it comes to real property, market value is just a starting point. If you see that a specific stock is trading for $100 a share right now and you sell or buy immediately, you'll be likely to get that price. Just because a home appraised for $250,000, however, doesn't mean that's what you end up selling or buying it for.
Buying and selling real estate is complex and takes weeks or months. The actual sales price is impacted by more than fair market value. The number of motivated buyers, their credit situations, willing or unwilling lenders, and many other factors can impact the final outcome of real estate transactions.
Our take on market value
Market value may not always dictate market or sales price. But it's important to be aware of these values, especially as you look to invest for your long-term goals like retirement.
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