Fair market price is the price that the given property will fetch when sold in the market with both the buyer and seller willing to get the best price.
This term is commonplace in legal procedures because, sometimes, it is nearly impossible to assign a fair value to some types of assets.
Comparing with market value, which is the price for which the given asset would be sold in the market at the time of record, fair market value (FMV) is the same.
However, fair market value has the following additional assumptions:
Buyer and seller each possess average or above-average information about the asset.
Both the buyer and the seller act in he owns self interest
Neither side is placed under pressure to act
Each is accorded a reasonable time duration within which such a transaction can be accomplished.
In light of these conditions, an asset’s fair market value should be a true or real value or assessment of the asset against its existing market price.
They may cause that an asset’s value is more or less than its market value Despite the mentioned advantages, it must be mentioned that these assumptions can make an asset’s value higher or lower than its market value.
This definition of the term used in accounting, tax law, bankruptcy law, divorces, and the real estate market as well.
Key Takeaways
The fair market value is the amount that an asset will sell for on the market with specific standards put in place.
The conditions are: the buyer and the seller are informed on all that would happen; both are acting for their own benefits; no coercion is involved nor is time a factor in making the decision.
Market value and appraised value are two different terms from fair market value.
It is most usually applied in the tax settings and the market of real estate.
Insurance organizations apply fair market value for specifically calculated compensations.
Key Characteristics of Market Value
Market value reflects the current worth of the firm based on the prevailing stock price and the number of outstanding shares The value of a firm’s stocks is determined by current market price, and the number of males available in the market Hence, it only takes into account the …
Dynamic Nature: Market value, therefore, depends on conditions within the market, investors’ attitude, economy, and the industry.
Transparency: This is because efficiency in markets makes price information available for all the participants and hence providing proper valuation of prices.
Subject to Speculation: Speculative processes can distort up or down values in a given market, relative to intrinsic value, for some time.
Importance of Market Value to Investors
Market value is a vital tool for investors, serving multiple purposes:
Valuation Benchmark: They include portfolio valuation and over/undervaluation: It helps in determining the general believability of an asset within its market value.
Performance Metrics: Market value is in turn employed to determine the rate of return on investment as well as to contrast the value of assets.
Liquidity Assessment: This usually implies that high market value suggest that the asset is liquid that you can easily sell it or buy it.
Portfolio Diversification: Market values help investors to make better decisions on the investments and the proportion they deserve in various markets and risks.
Decision-Making: It helps to make buy, sell and hold recommendations depending on market circumstances in the market.
Practical Uses of Fair Market Value
This is the most familiar bases for municipal property taxes as they tend to use the FMV of the owner’s property.
Based on this, the amount which a home owner can be liable to pay when accessing the residence can be considerably large depending on how long he has been an owner of the home. Real estate professionals rely on standards, guideline, and national and local regulation to compute the homes’ FMV.
It is also customary in use in the insurance industry as well, although this may come with somewhat different implications. For instance, when an individual makes a claim following an auto accident, the insurance company that is responsible to cater for the owner’s damaged car has a threshold of the FMV of the damaged car.
Fair Market Value and Taxation
This paper examines the practical application of CCMs in Fair Market Value and taxation.
Tax authorities nearly always guarantee that transactions are enacted at FMV, at the very least for tax purposes.
For instance,
where a man is retiring, he may transfer shares in a business to his daughter for $1 with a view to her continuing the business.,
but if the FMV of the shares is higher then; In that case, it is perfectly possible that tax authorities like the Internal Revenue Service (IRS) will recharacterize the transaction for tax purposes.
The father will have to pay taxes with regard to the disposal of the shares as if he had sold it at FMV to another person.
One of tax practice’s many fields where the use of FMV is quite common is gifting property like artwork, to charitable organizations. In such instances, the donor is normally provided with an offset of his or her tax liability to the value of the contribution.
Since tax authorities require the credit to reflect the fair market value of the object, they will often demand independent appraisals of the donated property.
Proper use of fair market value when charging taxes significantly reduces the chances of negative monetary consequences in the future or accusations of the authorities’ fraud.
How Are Assets Valued in a Divorce?
Every state has laws that govern the division of property acquired during the marriage.
Some examples of tangible forms of liquid assets are stock, bonds and they are often valued afresh based on their current market price.
Electronics, household products and vehicles are sold according to book value which is normally cheaper than the actual cost of the items.
Tangible products such a real estate, jewelry, artworks, professional and other degrees and businesses are also challenging to price and may, therefore, need the valuation professionals or value assessors to testify the appropriate prices.
Market Value vs. Fair Market Value
Factors Influencing Market Value
- Supply and Demand: High demand and low supply increase market value, while the opposite reduces it.
- Economic Conditions: Inflation, interest rates, and GDP growth impact asset prices.
- Industry Trends: Sector-specific dynamics, such as technology advancements, influence valuations.
- Company Performance: For stocks, financial health, earnings, and growth prospects are crucial.
- External Events: Geopolitical events, natural disasters, and regulatory changes can affect value.
How to Calculate Market Value
Market value calculation methods vary by asset type:
Stocks
For publicly traded companies, market value equals the share price multiplied by the total number of outstanding shares.
Formula:
Example:
- Stock Price: $50
- Outstanding Shares: 1,000,000
- Market Value: $50 × 1,000,000 = $50,000,000
Real Estate
For properties, market value can be assessed through comparable sales (comps), cost approach, or income approach.
Bonds
For bonds, market value depends on face value, interest rates, and time to maturity. Bond prices fluctuate inversely with interest rates.
FAQs on Market Value
1. What distinguishes market value from intrinsic value?
Market value refers to the present trading price of an asset and the intrinsic value refers to the present worth of the asset as ascribed by the analyst.
2. What does market value mean for investors?
Market value is used to determine whether an investment is good for purchase or to be held for a while or is to be sold and is used in the assessment of portfolio value.
3. What is the difference between; Market Value and assessed value?
Market rate is set in the market while the assessed value is an estimated price done by a professional.
4. Is market value necessarily higher than fair market value?
Certainly, warrant or other factors that leads to market value being higher than fair market value.
5. What is the application of market value in real estate?
Real estate market value means the price for which a property is willing to be sold at the time of purchase and can be estimated from the comparable sales.
6. Is Market value synonymous to book value?
Thereof, while book value calculates the actual value of an asset on balance sheet, Market value on the other hand represents the amount that is achievable in the market.
7. What is it that determines changes in the total value of stocks?
Such factors include the performance of a particular company, general economic epochs, industry outlook, and investment patrons’ feelings.
8. Is it possible for market value to shift rapidly?
Of course, by news, events, or variations in the demand and supply of the firm’s stock, market value may fluctuate dramatically.
9. How does one allocate a price for bonds in a particular market?
The fundamental of bond market value are summarized as; interest rates, time to maturity and the coupon rate of the bond.
10. Why is market value relevant to M&As?
Market value enables decisions to be made as to what the correct value of an organisation or an asset for sale or purchase is depending with market conditions.