Market Value

What is Market Value?

Market value is commonly used to refer the market capitalization of a publicly-traded company.

It is obtained by multiplying the number of its outstanding shares by the current share price. Market value is the price an asset would fetch in the marketplace. A company’s market value is a good indication of investors’ perceptions of its business prospects. The Range of market values in the marketplace is enormous, ranging from less than INR 500 crores for the smallest companies to millions for the larged sized an successful companies.

Market value is easiest to determine for exchange-traded instruments such as stocks and futures, since their market prices are widely disseminated and easily available, but is a little more challenging 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.

Market Value Formula

The market value (MV) of a company is calculated using the following formula:

MV of a Company = No. of outstanding shares * Market Price per share

Market value is determined by the valuations or multiples accorded by investors to companies, such as price-to-sales, price-to-Earnings, Enterprise Value-to-EBITDA, and so on. The higher the valuations, the greater the market value.

Importance of Market Value

The future estimation of the market value of an asset should be considered before the initial purchase. Especially in the case of securities & stocks because the investment here is made with an assumption of future value.

Companies having a market value under their Book Value are often appealing to the investors because it indicates that these businesses might be undervalued.

Difference between Market Value and Book Value

Book value reflects what a business is worth according to its financial. Whereas, the market value reflects the worth of business as the market participants.

The book value determines the value of a company’s equity, that is the equity value that the shareholders should receive in case of the company’s liquidation. On the other hand, the market value can be easily determined for highly liquid assets such as equities or futures.