DEFINITION of fair value
Fair value is the sale price agreed upon by a willing buyer and seller. Always in a case, both parties enter the transaction freely and knowledgeable.
WHAT IT IS IN ESSENCE
Many investments have a fair value determined by a market. It also represents the validity of a company’s assets and liabilities when a secondary company’s financial statements are in consolidation with a parent company.
It has two contents to investors:
- a) the value attributed to a stock by an individual investor or broker.
- b) in futures trading, to refer to the price prediction of a market which is reflected in the cost to open a position
In many companies, the sale price of the stock can be subject of debate among investors. Technology companies that show guarantee but not profit can have fluctuating fair values from different brokers and investors, for instance.
Sale price value of a futures trade reflects whether the seller believes that the market is going to go up or down before the futures contract expires.
This is an estimate of a security’s worth on the open market. There is no one way to calculate the sale price for a security. But calculations typically take into account future growth rates, profit margins, and risk factors, among other items.
HOW IT WORKS
The question of what a security is really worth is one of the basic subjects in investing. By calculating a fair value, investors are able to answer this question, although it may not be precise.
Nevertheless, fair value estimates are key to any investor’s repertoire.
Approaches to fair value can distinguish value investors from growth investors.
Growth investors rely on earnings estimates that could be wrong, too high, or otherwise unreliable.
Value investors only buy stocks selling at a discount to their fair value. And then wait for the fair value of their investments to be realized.
Even though both types of investors must face the prospect that their companies may falter, mature, or get so big that maintaining historical growth rates is impossible.
Most value investors buy stocks with the expectation that the stock price will rise to match the fair value of the company.