Market value defines how much an asset (like a company) is worth on the public market. In the stock market, market value refers to the current price of a company and reflects investors’ sense of that company’s prospects. It’s dynamic, meaning that it shifts constantly as the market adjusts.
Usually, the term refers to a company’s open market valuation (OMV), which is how much a certain asset is worth on a competitive, open market. If a company’s stock is being traded in a fair market (meaning that it’s not under distress and between a willing buyer and willing seller), the market value of a company is also the same as its market price.
Table of Contents:
- Calculating Market Value
- Market Capitalization
- Book Value vs. Market Value
- Limitations of Market Value
- Market Value for Non-Stock Assets
- How Market Value Affects Your Investment Strategy
Market value is calculated differently depending on the type of asset and exchange on which it exists. For companies, most market value assessments come from valuations. Publicly-traded companies often have a market value established by their market capitalization, or the collective value of its shares. If you’re unsure whether a company’s market value is affecting its stock price, Public Trends can offer information on long-term movements in pricing.
Calculating Market Value
Market value is not a static metric, meaning that it can change depending on market conditions at the moment it was calculated. There are several major ways to calculate market value, including:
There are two ways to calculate market value using income: Discounted Cash Flow (DCF) and Capitalized Earnings Method. The DCF approach involves estimating a company’s future cash streams and then discounting it to its current value.
The Capitalized Earnings Method is used only for income-generating property. It is calculated by dividing net operating income over a given period by the company’s capitalization rate.
This approach involves finding the difference between the fair market value (FMV) of a company’s assets and its liabilities.
There are two ways to calculate market value using the market approach: public company comparable and precedent transactions. The public company comparable approach involves looking at a given company in relation to similar businesses. From here, you can calculate ratios like EV/EBITDA and the P/E ratio, which can be used to value the company.
The precedent transactions approach uses the price paid for similar companies as a reference for the valuation. This method is usually used for mergers and acquisitions.
The easiest way to calculate a company’s market value is to determine its market capitalization. While market cap is often used interchangeably with market value to refer to the value of a publicly-held company, it is just one way of valuing a company. A company’s market cap is equivalent to the total value of shares on the market. It is first established after that company’s initial public offering and varies depending on the current share price.
The formula to calculate a company’s market capitalization is:
Market Cap = Current Share Price * Total Number of Shares Outstanding.
If a company’s current share price is $100 and it has 1 million shares available, its current market cap would be $100 million. Like other forms of market value, a company’s market cap is dynamic and changes with financial market conditions.
A publicly-traded company can be large-cap, mid-cap, or small-cap, depending on its market capitalization.
Large-cap (or big-cap) stocks have a market cap of more than $10 billion.
Mid-cap stocks usually have a value of between $2 billion to $10 billion.
Small-cap stocks have a market cap of around $2 billion to $250 million.
It’s also important to remember that most market capitalization calculations offer a value for the diluted market cap, or the hypothetical price of a company if all of its stock was liquidated.
Book Value vs. Market Value
In this context, market value refers to market capitalization. While this measure reflects the company’s value on the stock market, a company’s book value only reflects its value on the balance sheet.
|Book Value||Market Value|
|Net value of a company’s assets, as read on its balance sheet||The company’s worth based on its market capitalization, or value of all outstanding shares|
|Calculated by subtracting total liabilities from total assets||Calculated by multiplying the current share price by the total number of outstanding shares|
|Usually less than market value||More than book value because it accounts for future value and intangible items|
|Used to measure the net asset value (NAV) investors receive after buying a share||Offers a sample price that an asset would receive on the stock market|
|Fails to account for the whole value of a company and may not accurately reflect depreciation||Market cap can move significantly over the course of a trading day, making a precise valuation difficult to achieve.|
Limitations of Market Value
While market value can be a useful asset for many investors, as well as an accurate gauge of investor sentiment, there are also several limitations. The two biggest limitations are the fact that fluctuates significantly and need for precedent data. That’s why some investors choose other strategies, like the earnings per share (eps) approach, to gauge the profitability of their investments.
The market value of an asset can fluctuate in the long term and in the short term. It’s not unusual to see a large-cap stock move 3-5% in a single trading day. This can lead to overbuying or overselling based on perceived market value. Public’s social investing feature allows a community of investors, creators, and analysts to share their insights and perspectives on whether a stock’s market value is being overbought or oversold directly within the app.
Market value also requires precedent data, or information from other companies or previous trades. This isn’t always possible for newer assets, which may lack a large trove of preexisting data. Without this data, it may be impossible to determine an asset’s market value or the market value may be inaccurate.
Market Value for Non-Stock Assets
The concept of market value applies to any asset, not just the stock market. Investors may also encounter market valuations for non-stock assets like real estate and crypto. In some cases, these values are calculated similarly to stocks. In other cases, entirely different formulas are used.
Market values for cryptocurrency assets are usually calculated using a coin’s market capitalization. In this case, market cap refers to the total value of all coins of a certain kind that are available in the market. This is calculated in the same way you would calculate market cap for a company: multiply the total number of coins by the current market price of an individual coin.
Public lets you buy and sell major cryptocurrency tokens, as well as reports the current market cap for those coins.
Market value in real estate is highly complex. As most people who have tried to purchase a home can attest, property valuations are often based on fair market value (FMV). In this case, FMV refers to the price a property would sell for in a fair, open market under standard conditions.
However, many real estate properties are valued using comparable sales or replacement cost approaches. As a result, the actual market value or value determined by real estate appraisers will likely differ from the FMV. If you’re interested in investing in real estate, Public offers access to a variety of real estate investment trusts (REITs). If you buy a share of an REIT, the value of that asset will be determined using stock market valuation approaches, rather than real estate valuation strategies.
How Market Value Affects Your Investment Strategy
Market value is a good metric for determining investor sentiment about a certain company. In turn, that sentiment can affect investors’ decisions about which assets to invest in.
Market capitalization is particularly useful for structuring your stock market strategy. While individual investors often think that they should stick with large-cap stocks, companies with smaller market caps can also lead to good returns. Large-cap stocks tend to be more stable, but also generate lower returns. On the other hand, small-cap stocks are usually highly volatile but may generate larger returns.
If you’re watching market caps change in real time and are looking for insights on the factors behind these shifts, tune into Public Live for up-to-the-minute commentary on market moves.
And if you’re particularly focused on a single company and want to understand why its market value has moved, Public Townhalls let you talk directly with founders and CEOs who can answer your questions.
Major stock indexes, like the S&P 500 or Dow Jones Industrial Average, track large-cap stocks like Apple and Alphabet (Google) respectively . However, other indexes like the Russell 2000 or S&P Small Cap 600 track small-cap stocks like Bed Bath & Beyond and Sonos respectively. In many cases, Public offers access to ETFs that invest in or roughly follow the performance of these indexes.
Market value also factors into several prominent investing strategies. Value investing involves buying a stock when it is undervalued on the market and holding onto it until the market value more closely resembles its actual value. Other approaches, like dollar-cost averaging, involve ignoring market value and investing the same amount on a regular basis, regardless of the stock’s price
What is market value?
Market value is an indicator of how much an asset is worth on a public market. It’s used to understand investor sentiment about companies.
How do you calculate market value?
There are a variety of ways to calculate market value, depending on the intended purpose and the industry in which the asset exists.
Why does market value matter?
Market value gives investors a sense of how the market feels about a certain company. It also has a variety of insurance and tax uses, as well as a tool for business valuations.
Are Book Value and Market Value the same?
No. Book value refers to the net value of a company’s assets on its balance sheet, while market value refers to an asset’s value on a public market.
What is the difference between market cap and market value?
While market capitalization (also known as market cap) is often used interchangeably with market value, it is just one way of calculating market value. Market cap refers to the total value of a publicly-traded company’s stock.