Definition of fair value

The value of a product or service based on the price at which it could be sold in a transparent and free market with both seller and buyer happy to trade and armed with all relevant information.

Applied to stock valuations, fair value is the price that a securities analyst or investor places on a stock based on a commonly accepted valuation system, such as net asset value per share. In futures trade, it is the spot price of the underlying asset plus the cost of carry. Also called fair price.

Fair value is used to distinguish between the amount that someone pays for an asset, which should be referred to as its historical cost. Historical cost, unlike fair value, may not be a good indication of what an asset is worth today.

 

fair value in the news

In February 2014 an economist blogging for the Financial Times noted that US equities were trading about 70 per cent above fair value. He derived his calculation of fair value by using both  CAPE and Tobin's q, two different valuation systems.

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