Market value
Market value
A company's market value is a good indicator of investors'
perceptions about its business prospects. The range of market values in the
market is enormous, from less than a million dollars for the smallest companies
to hundreds of billions for the largest and most successful companies in the
world.
Market value is determined by valuations or multipliers that
investors provide to companies, such as price to sales, price to earnings,
company value to EBITDA, etc. The higher the valuations, the higher the market
value.
The dynamic nature of market values
Market value can fluctuate dramatically over periods of time
and is greatly influenced by the business cycle. Market values decline during
bear markets associated with recessions and rallies during emerging markets
that occur during economic expansions.
Market value also depends on many other factors, such as the
sector in which the company operates, its profitability, debt burden, and the
broad market environment. For example, Company X and Company B may have $ 100
million in annual sales, but if Company X is a rapidly growing technology
company while B is a massive retailer, then the market value of X will
generally be much higher than that of Company B.
In the example above, Company X might trade at a sales
multiplier of 5, giving it a market value of $ 500 million, while Company B
might trade at a sales multiple of 2, giving it a market value of $ 200
million.
The company's market value may differ significantly from
book value or shareholder equity. A stock is generally considered undervalued
if its market value is much lower than the book value, which means that the
stock is traded at a significant discount from the book value per share. This
does not mean that the share is overestimated if it is traded at a premium over
the book value, as this again depends on the sector and the extent of the
premium in relation to the share's peers.
Book value is also known as explicit value, and it can
greatly affect the implied value of the company (i.e. personal perceptions,
investor and analyst research), which in turn affects whether the company's
share price rises or falls.
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Market value (also known as OMV, or "open market
valuation") is the price that an asset will bring in the market, or the
value that the investment community gives to a particular stock or company.
Market value is also commonly used to denote the market value of a public joint
stock company, and is calculated by multiplying the number of its outstanding shares
by the current share price. It is easiest to determine the market value of
exchange-traded instruments such as stocks and futures, since their market
prices are widely spread and readily available, but it is difficult to
ascertain the over-the-counter instruments such as fixed income securities.
However, the greatest difficulty in determining market value is in estimating
the value of illiquid assets such as real estate and companies, which may
require the use of real estate appraisers and business valuation experts
respectively.
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