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Evaluating where a business stands in relation to its competitors and industry is a key step in deciding whether a stock is worth your investment.
Market value, or the value of a security in the eyes of the market, is one of the many metrics investors use to evaluate a company's worth. If you're looking for a leg up to spot the right investment opportunities, understanding all the factors that comprise an asset's market value is a must.
Market value, sometimes called open market valuation, is the value of a company's stock in the marketplace. The metric is influenced by how investors view a company's potential.
Market value is about a "company's overall actual value" and factors in things like "how profitable the company is, how much debt it may have, and even the financial health of the sector of the economy it is in," says Bobbi Rebell, a certified financial planner.
A company's market value is useful in eliminating the uncertainty behind what an asset is worth. Buyers and sellers don't always agree on a value of a product, and each side has different goals, with buyers hoping to pay less and sellers hoping to charge more. Market value provides a fair estimation of the value or worth of any given asset.
Market value is a dynamic measurement that fluctuates considerably with time and takes numerous factors into account, such as: long-term growth potential, supply and demand of a business's shares, and valuation ratios used to evaluate whether a stock is overpriced, underpriced, or priced fairly.
The most common market value ratios used to evaluate a company's stock include:
Market values exist within a wide range, with smaller, more niche companies or industries valued considerably below their better-known, billion-dollar counterparts. The higher a company's estimated worth, the greater its market value.
Since it is determined by various metrics, there isn't a single formula used to calculate market value.
If you're looking for a quick way to calculate market value, you may be thinking of market capitalization, a similar, but wholly different metric used to determine a company's financial standing.
For private companies that don't publicly disclose financials, it can be harder to assess market value. It's typically done by comparing a private business's value to publicly-traded ones in the same industry with similar sizes and growth rates, and calculating relevant ratios to contextualize its performance.
When assessing whether an asset is appropriately valued, market value is typically analyzed side-by-side with book value. Book value is basically the value of a company according to its books, or balance sheet.
To get a company's book value, you take the difference between a company's total assets and total liabilities.
Book value takes a little more work to calculate than market value. A stock is generally considered undervalued if its market value is well below its book value, since this means the stock is being traded at a discount. However, the opposite is not necessarily true.
Profitable companies often have higher market values than book values. This is because investors are optimistic about their potential for growth and expansion, and also because some companies have more earnings power, or ability to generate profit, than current assets. In some cases, however, a higher market than book value could, in fact, indicate that the asset is overvalued.
Market value is a term often used interchangeably with market capitalization, but wrongfully so.
Market capitalization is a much simpler measurement than market value. To arrive at a company's market capitalization, you multiply the number of shares outstanding by the current price of a single share. Market capitalization solely measures the equity value of a company.
In contrast, market value paints a broader, more nuanced picture of a company's financial standing. It isn't set in stone, but varies depending on the state of the economy, falling during times of recession and rising during periods of expansion.
Market value is also more significantly influenced by market perception than market capitalization. Rebell says that because market value has so many subjective components, it has a lot in common with market perception.
"Perception, of course, can be anything including what journalists are writing about the company or the perception of a company created by the founder's tweets. A great example is Tesla. By many financial metrics, one might say the stock is overvalued. However, comments made by Elon Musk and the perception they create have factored into the stocks performance," says Rebell.
This leads to one of market value's limitations: how much it can fluctuate.
Market value is affected by factors like what industry the firm or asset belongs to, its overall profitability, and how much debt it's taken on, among other factors. Here are some limitations of using market value as a guide for when to invest in an asset.
Market value calculations offer both sides of the equation a fair and transparent assessment of worth. However, because it can be so subjective, it's important for investors to decide for themselves which metrics are most important in their own evaluation of an investment.
Market value illustrates an asset's value to investors in the marketplace and is often used alongside other measurements to assess whether a firm or asset's valuation is accurate.
This metric brings clarity and transparency to both buyers and sellers, but fluctuates with time, depending on factors like industry and economic conditions.
