What is Market Value?
Market value (also known as OMV) is the price an asset would collect on the marketplace or the value that the investment community gives to particular equity or business. Market value is also widely used to refer to a publicly-traded company's market capitalisation and is determined by multiplying the number of its outstanding shares by the current share price.
Market value for exchange-traded securities such as stocks and futures is easiest to assess since their market prices are widely disseminated and readily available but are a little more difficult 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.
Breaking Down Market Value
The market value of a company is a good indication of the expectations of investors about its business prospects. The industry scale of market values is massive, ranging from less than $1 million for the smallest companies to hundreds of billions for the biggest and most successful companies in the world.
Market value is determined by the valuations or multiples granted to companies by investors, such as price-to-sales, price-to-earnings, enterprise-to-EBITDA, and so on. The higher the appraisal, the larger the market value.
Dynamic Nature of Market Value
Market value can fluctuate greatly over a time period and is affected significantly by the business cycle. During bear markets, market values fall, which follow recessions and rise during the bull markets which occur during economic expansion.
A firm's market value can differ significantly from the value of the book or the equity of the shareholders. A stock will generally be considered undervalued if its market value is well below the book value, which means that the stock sells to book value per share at a deep discount.