Market value


Market value is a term used in the financial world to indicate what a company or asset is worth. It is the value of an asset determined by market participants and is the amount the asset should trade for on the open market. Market value can be contrasted with book value, which is a company’s accounting value (based on its financial statements). Both values are important performance markers used when assessing companies.

A closer look at market value 

Market value refers to a company or asset’s relative worth. The worth, or value, is relative because it’s based on market participants, hence the term market value. So, the definition of market value is the relative value of a company or asset based on market sentiment. 

Market sentiment can be defined as the perception of market participants. In the context of financial markets and trading, the participants are traders. Therefore, the market value of a company or asset is defined by the sentiments (perceptions, thoughts and actions) of traders. These sentiments are influenced by factors such as the amount of money a company is making or losing, news, economic conditions and recent trading activity.  
For example, the market value of Microsoft could be high if the company had just reported record profits. Why? Because traders would feel positive about Microsoft’s current final position and, therefore, want to buy. When this happens, demand for shares in Microsoft increases. That increases the company’s market value. 

Market value is also dynamic. The value assigned to a company or asset can change over time as market conditions and sentiments change. This means, in a general sense, that market value is subjective. 

Market value as market capitalisation 

In relation to publicly traded companies, market value typically refers to market capitalisation. In general terms, the number of shares traded vs the number of shares issued determines a company’s market capitalisation. 

This ties into the definition of market value above, because trading activity is based on public perception. When a company is held in high regard, it’s usually the case that a lot of people want to buy shares in it. This pushes up the market value (market capitalisation). 

When a company isn’t performing well and people aren’t trading its shares, the market value drops. This relationship between market sentiment (trading activity) and value becomes clear when you look at the following equation: 

Market value = shares in circulation x market price 

If the market price (the price at which an asset is actually offered in the market) is $10 and there are 20,000 shares in circulation, the company’s market capitalisation is $200,000. This value will change if the market price changes. 

If more people want to trade shares, demand increases. If the supply remains the same, the market price will increase because demand is greater than supply. This change in price will push up the company's market value. 

Let’s say increased demand pushes up the share price to $15. The equation would now be 20,000 times $15. This would make the company’s market value $300,000 instead of $200,000. From this, you can see how trading activity based on market sentiment affects the market value of a company. 

Why are market value and book value important? 

Overall market trading activity affects the market value, and the movements in trading activity are important for traders when strategising—both outside of and as part of determining the market value.  

Another way to assess a company’s worth is through its book value. The book value of a company is based on its financials: assets minus liabilities. For example, if the company has $1 million worth of assets, $500,000 in cash and $250,000 worth of liabilities (debt), its book value is: 

$1 million + $500,000 - $250,000 = $1.25 million 

The relationship between market value and book value is important to traders looking for potentially profitable stocks. Comparing the two numbers can help give you a better overall picture of the outlook for the company.  
If a company’s market value is lower than its book value, this means market participants do not feel the company is really worth what the financials show (and anticipate a reduction in value). If a company’s book value is lower than its market value, this indicates that the market participants expect the company to see higher earnings in the future. Both metrics can provide more insight into your analysis of a company or asset. 

What does market value (and its comparison with book value) mean for traders and their portfolios? 

The meaning of market value in relation to financial securities is important because it helps you determine whether it’s a good idea to take a long or short position.  

Let’s say the market value appears to be out of sync with your assessment of the security’s true value. In this situation, it may be worth taking a short position, with the hope that its market value will fall. If the market value appears to be lower than what you expect, it may be worth taking a long position with the hope it increases. 

You can also compare market value to a company’s book value as a way of determining whether it’s worth taking a long or short position on stocks. When a company’s market value is below its book value, it’s described as undervalued. When stock is undervalued, it’s often considered potentially profitable because the market value is lower than what the company is actually worth: the market value and stock price has room to increase. 

Conversely, when the market value is higher than the book value, the company may be overvalued. An overinflated market value may signal that a stock is going to lose value. In this situation, it may be best to exit a long position or take a short position. 

How to use market value when you trade

Market value isn’t the only metric you can use when assessing whether it’s worth trading stocks and other assets. However, it’s an important one to consider as part of a holistic trading strategy.  

The first step is to find stocks within an industry or area you’re interested in. Focusing on stocks that have some relevance to your interests and/or expertise will help you make more informed decisions. Once you’ve found some stocks to focus on, look at the current price and compare that against the market sentiment. 

Use news stories, analytical data and financial reports. If, based on your assessment, the market value doesn’t align with the current share price, it could be a good time to invest. You can take long or short positions depending on where you see the company’s trajectory. If you can incorporate market value into your overall assessment of stocks, you can get a better idea of how they might perform and make your trades accordingly.  

Put this into Practice


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