What is Market Value: Clear Explanation and Calculation Methods

Written by 
Polina Medianina
/
November 22, 2021

Answer: Samsung

Hover your cursor over the buildings and look at the connections between the companies
⬇️

Market value simply how to calculate photo
Table of contents

Sooner or later, an investor needs to know what the market value of a company is to be able to evaluate the place and success of a company on the market.

Gainy can help pick the right stocks specifically for your risk profile

Try GainyTry Gainy

So, if you consider buying stocks for long-term investment and want to determine companies worth your money, you are in the right place. In this article, we will answer the following questions:

  • What is market value? 
  • What factors affect the market value of stocks? 
  • Why should traders monitor the market value of stocks?
  • What is the difference between market value and price?
  • How is market value determined?

What is the Market Value? Definition

What is a stock's market value? Formally, it is the price that investors are willing to pay for an asset. It is determined by considering all sources of its funding: debt obligations, preferred stock, minority interests, and common stock.

What is the Market Value of a Company?

The market value of a company is the same as the market value of shares. Usually, the number is influenced the most by the potential of a company for investors, considering its profitability, debt, growth prospects, etc.

It’s important to choose the right method for estimating the market value of a company to eliminate ambiguity in its valuation.

Usually, buyers and sellers estimate the value of goods differently. Buyers want to pay less, and sellers hope to get more. The main purpose of determining market value is to give a fair estimate of the value or worth of an asset. Simply put, it is the price for which an item would normally be sold for. Buyers have the option to pay, and sellers can accept more or less than the market value.

What is a Stock's Market Value?

Stock market value is the price at which shares are bought and sold on the secondary market. Unlike other types of value, stock market value is formed in the process of stock trading. It depends on supply and demand for the stock of a given corporation and is updated daily. In some cases (for example, in stock exchanges terms), a different market value definition is used — quote. You should buy a stock when its quotation falls briefly and sell it when it rises.

Market Value vs. Market Price

Price is what you pay, and value is what you get.

This is perhaps the most fundamental difference between the concepts of market price and value. When you buy a product or stock, you pay a certain market price. Particularly when it comes to stocks, the market price is based on a combination of subjective and objective factors. In fact, you pay the price or market value of a stock. But value is what is in the asset. The value is determined by the value of the stock, which in turn depends on how much cash flow the company can generate in the future.

There are different criteria and processes of estimating the value of the stock. However, the buyer is primarily interested in earnings prospects, potential dividends, and the company’s financial condition. These three fundamental factors determine the estimated price of the stock since they guide investors, comparing stocks to other investment opportunities available to them.

Of primary interest to investors is the market value of equity, i.e., the price at which a stock is sold and bought in the market.

What Affects the Market Value? 8 Essential Factors

Demand

Demand is determined by consumer preferences, which depend on what income this business brings to the owner, at what time, what risks it carries, what opportunities to control and resell this business.

Income

The income that an owner of a facility can earn depends on the nature of the operation and the opportunity to make a profit on the sale of the facility after it is used. Operating profit, in turn, is determined by the ratio of income and expense streams.

Time

Of great importance to the formation of the value of the enterprise is the timing of revenue streams. One thing if the owner acquires assets and quickly begins to profit from their use, and it is another matter if the investment and the return of capital are separated by a significant period.

Industry Risks

The company's profits may decline in the future, sometimes, unpredictably, negatively impacting its share price. Among widespread risks are competitive threats, product substitution, industry prospects in general, etc.

Control

One of the most critical factors affecting value is the degree of control that the new owner has.

If a business is purchased as individual private property, or if a controlling interest is purchased, the new owner has substantial rights such as the right to appoint managers, determine their salaries, influence business strategy and tactics, sell or buy its assets, restructure or even liquidate the business, decide whether to take over other businesses, determine dividends, etc. Because you buy more rights, the value and price are usually higher than when you buy a non-controlling interest.

Liquidity

One of the most important factors in estimating the market value of a business and its property is the degree of liquidity.

The market liquidity of assets affects their price and expected return. Investors require higher returns on assets with lower market liquidity to compensate for the higher cost of trading those assets. That is, for an asset with a given cash flow, the higher its market liquidity, the higher its price, and the lower its expected return. 

Restrictions

The value of a business responds to any restrictions the business has. For example, if the government restricts the price of a business's products, the value of that business will be lower than if there are no restrictions.

Supply and Demand Ratio

Demand for a business, along with utility, also depends on the solvency of potential investors, the value of money, and the ability to raise additional capital in the financial market. An investor's attitude toward the level of return and the degree of risk depends even on age. Younger people tend to take more risks for higher returns in the future.

Examples of rises and falls in stock prices

  • On March 12, the day after Donald Trump banned travel from Europe to the U.S., U.S. airline stocks reacted to the market situation and dropped significantly in value: United Airlines — almost 16%, Delta Air Lines — almost 15%, American Airlines — 19%, Southwest Airlines — 14.3%.
  • Because of the coronavirus situation and unfavorable market conditions, oil and gas companies also suffered enormous losses. The closure of transport links and the shutdown of several production facilities led to a decrease in demand and, consequently, a drop in oil prices. For example, shares of Continental Resources, one of the largest U.S. shale oil producers, fell by 73% over the past three months. Amid the spread of the coronavirus, the company refused to pay a quarterly dividend and said it would cut production by about 30%.
  • In the face of self-isolation, many have turned their attention to virtual entertainment, including video games. One of the beneficiaries of this process is Electronic Arts, the largest representative of the gaming industry. Since the beginning of the year, Electronic Arts shares have risen 7% to $114 per share.
  • The growing demand for electric cars drives up the price of its largest manufacturer, Tesla. At the very beginning of 2020, Tesla shares could be bought for $84.90, but now the price of one share exceeds $700. Meanwhile, experts believe that Tesla stock hasn't exhausted its potential and will continue to grow as its share in the electric car market increases.
  • Against the background of the U.S. authorities' decision to allow the sale of tobacco heating systems, iQOS shares of its manufacturer Philip Morris (PM) rose by 2%. The fact is that this position of the government opens a new financial market for PM, which is beneficial to the profitability of the company, and, accordingly, stimulates the growth of the value of their shares.
  • Apple's revenue for its first fiscal quarter of 2019-2020, which ended December 28, 2019, was $92 billion, a record high for the company. The positive report encouraged investors to buy Apple stock, which immediately responded with an increase of about 2%.

How to Calculate Market Value?

A very common question among investors is how to calculate the market value of a company

There are several ways to calculate the market value of a firm and market capitalization. This is important for every investor who wants to know if it makes sense to buy or sell a stock.

Estimating a company's value based on its stock price

If a company's stock is already traded on a stock exchange, the easiest way to calculate its market value is to multiply the number of shares outstanding by the current price at which the stock is traded on the relevant exchange. If the shares are only traded on an exchange, the trading volume may be so small that the trading prices are not realistic.

Valuing a company by sales multiples

A reasonable alternative is to estimate market value for those companies whose trading volume matches their market prices. This latter approach may be fraught with some uncertainty since the more reliable companies may reasonably cost a lot. In that case, the market value is likely to be excessively high.

Market valuation company value by comparison companies

Another approach to estimating market value is to look at what similar companies sell for as a percentage of their sales and use that ratio to determine the value of the business. The main drawback of this approach is that the best companies are likely to be sold first and therefore get better multiples; companies sold after the first tranche do not perform as well and thus probably should be sold at lower multiples.

Final Thoughts

So what does market value mean? Hope we clarified that in the article. Moreover, we’ve discussed why it is important to conduct market value accounting and explained how a stock's value differs from its price.

Want to quickly determine which stocks are worth buying based on your portfolio, personal goals, and fundamental analysis? Hurry up and download the Gainy app!

FAQ

What is the value, full value, fair market value, or full market value of a stock?

All these concepts have the same meaning for valuation purposes. They are defined as the price a willing buyer would pay to a willing seller in an arm's length transaction.Market value and sales price are not the same things. The major difference is that from the seller's point of view, the market value of any object may be much higher than the selling price the buyer is willing to pay.

What is the market value of a product?

Market value is the value for which an object can be disposed of by an agreement between buyer and seller. Let's compare two concepts: "price" and "market value." Price is a certain amount of money, actually transferred by the buyer to the seller for the performance of any service or receipt of any good. Interestingly, value is a calculated value; it shows the value of a given good or property precisely in monetary terms. Thus, market value is a set price that will be beneficial to the seller and the buyer.

What are the ways of determining the market value of a company?

There are three main ways to estimate a company's value. You can determine it by the company’s stock price, by sales multiples, or by comparison companies.

Sign up
Sign up
Rate this article, if you like it
22
votes  /  average rating:
4.7
Sorry
Not helpful
Nice but boring
Interesting and useful
Marry me Author
Download Gainy to find stocks with the best market value according to your interests and goals
Try Gainy
This is some text inside of a div block.
Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system. Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system.
This is some text inside of a div block.
Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system. Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system.
Arrow icon
Arrow icon
because I want to check what my friend has just sent me
The company developed and maintains technological products and services, namely Snapchat, Spectacles, and Bitmoji. Snapchat is the third most popular app among millennials and gets high profits from ads on the platform. Since TikTok is not available to invest in yet, Facebook is boring, we see Snap as a good choice to diversify your portfolio. We don’t know what keeps those kids so glued to screens in Snapchat but if companies profit from it, we can get a share thanks to investing in their stocks.
because xBox brings us together with friends
Microsoft is the second biggest company on the market in terms of capitalization. Xbox, Skype, Windows Office 365 are all part of Microsoft business as well as it develops, licenses, and supports a wide range of software products and services, as well as designs and sells hardware. The company’s future is as bright as it’s past with all the money the company invests in disruptive tools like AI. Next time you plan to buy another game for the Xbox console, you might also consider buying a Microsoft stock which is not very expensive.
because we want schools to be cooler
So we packed peanut butter and jelly sandwiches for the kids, now it’s time to go to school. The K12 Inc. is an educational technology company. The company offers a private education program, software and education services built to teach online for preschool students up to grade 12 or K-12. The company’s earnings soared up after the pandemic because we came to realise that online learning is not far in the future and may continue the trend.
because we like to treat our pets and ourselves, too
The American manufacturer of supermarket food JM Smucker Co also operates a pet food business including brands such as Milk-Bone and Meow Mix. It’s also the producer of the peanut butter JIF, kid’s all-time favorite filling. The company offers a 2.96% dividend yield and in the third quarter reported a 7% increase in net sales.
because we love playing games
If there is one game to teach you financial literacy - it’s Monopoly, which belongs to Hasbro, as well as unparalleled portfolio of approximately 1,500 brands including MAGIC: THE GATHERING, NERF, MY LITTLE PONY, TRANSFORMERS, PLAY-DOH, BABY ALIVE, DUNGEONS & DRAGONS, POWER RANGERS, PEPPA PIG and PJ MASKS, as well as premier partner brands. The company generates strong cash flows and pays regular dividends. The company’s business moves along the online trend and develops digital content in the form of TV shows, films, computer games.
because everyone has a favorite childhood hero
Disney is a widely diversified company which owns everything from toys to apparel, and books to video games: Disney Parks, ESPN channel, Pixar, Hulu and so much more. And now it bets on streaming services with Disney+ and threatens Netflix’s market share. The company revenue suffered a major drop last year due to closure of Disneylands, but has opened them in October and foresees a strong comeback.
Thank you!
Your submission has been received!
Oops! Something went wrong while submitting the form.
By clicking "Submit" you accept our Privacy Policy.

Related articles

bull market forecast JPMorgan photo
Bull Market vs Bear Market: Comparison of Investing Strategies 🕵️‍♀️
The difference between bull and bear markets, what you should know, how to identify which one you’re in and what to do about it as an investor.
Advanced
/
Oct 13, 2021
Liquidity in stocks stonks man magic 8 ball - photo
What is Liquidity in Stocks and Why Does it Matter?
Liquidity is one of the most fundamental concepts in finance and business in general. It is even more fundamental than the fundamentals of investment analysis, such as revenue, earnings, and profit
Beginners
/
Aug 27, 2021
should invest facebook google twitter photo
Top 7 Social Media Stocks and Why You Should Invest In Them
An average user spends roughly 3 hours daily on social media, checking the news, buying and selling things, and reading all kinds of content. AI and IT investments will make you not just rich.
Advanced
/
Nov 1, 2021
Download on the App Store
Thank you!
Your submission has been received!
Oops! Something went wrong while submitting the form.
By clicking "Submit" you accept our Privacy Policy.