what is fair value 
fair value is the estimated price at which an asset is bought or sold when both the buyer and seller freely agree on a price to determine the fair value of a product or financial investment an individual or business may look at actual market transactions for similar assets estimate the expected earnings of the asset and determine the cost to replace the asset investopedia nez riazunderstanding fair valuea common way to determine a stock s fair value is to list it on a publicly traded stock exchange as shares trade investor demand creates the appropriate bid and ask prices or market value and influences an investor s fair value estimate an investor can compare their fair value estimate with the market value to decide to buy or sell the fair value is often the price that an investor pays that will generate their desired growth and rate of return 1if the fair value of a stock share is 100 and the market price is 95 an investor may consider the stock undervalued and buy the stock if the market price is 120 the investor will likely forego the purchase as the market value does not align with their idea of fair value 2the fair value of a derivative is determined by the value of an underlying asset when an investor buys a 50 call option they are buying the right to purchase 100 shares of stock at 50 per share for a specific period if the stock s market price increases the value of the option on the stock also increases in the futures market fair value is the equilibrium price for a futures contract or the point where the supply of goods matches demand this is equal to the spot price and accounts for compounded interest and lost dividends resulting from the futures contract ownership versus a physical stock purchase fair value cash 1 r x360 dividendswhere cash current value of securityr interest rate charged by brokerx number of days remaining in contractdividends number of dividends investor wouldreceive before expiration date begin aligned text fair value text cash times big 1 r times big frac x 360 big big text dividends textbf where text cash text current value of security r text interest rate charged by broker x text number of days remaining in contract text dividends text number of dividends investor would text receive before expiration date end aligned fair value cash 1 r 360x dividendswhere cash current value of securityr interest rate charged by brokerx number of days remaining in contractdividends number of dividends investor wouldreceive before expiration date the international accounting standards board recognizes the fair value of certain assets and liabilities as the price at which an asset can be sold or a liability settled fair value accounting or mark to market accounting is the practice of calculating the value of a company s assets and liabilities based on the current market value in some instances companies who hedge their assets might use hedge accounting where the value of the asset and its hedge are accounted as a single entry to do this you will need to consider if a construction business acquired a truck worth 20 000 in 2019 and decided to sell the truck in 2022 comparable sale listings of the same used truck may include two trucks priced at 12 000 and 14 000 the estimated fair value of the truck may be determined as the average current market value or 13 000 it is difficult to determine a fair value for an asset if there is not an active market for it accountants will use discounted cash flows will determine a fair value by determining the cash outflow to purchase the equipment and the cash inflows generated by using the equipment over its useful life fair value is also used in a consolidation when a subsidiary company s financial statements are combined or consolidated with those of a parent company the parent company buys an interest in a subsidiary and the subsidiary s assets and liabilities are presented at fair market value for each account benefits of fair valuefair value measures the real or estimated value of an asset or liability fair value accounting is widely used in business and investing because of its benefits these include fair value vs market valuefair value is a broad measure of an asset s intrinsic worth it requires determining the right price between two parties depending on their interests risk factors and future goals for the asset fair value is most often used to gauge the true worth of an asset by looking at factors like its potential for growth or the cost to replace it market value is the observed and actual value for which an asset or liability is exchanged it reflects the current value of the investment as determined by actual market transactions it can fluctuate more frequently than fair value market value is also highly dependent on supply and demand for example housing prices are often dependent on the number of houses for sale in an area supply and how many buyers are currently looking demand as much as the intrinsic value of the house changes slowlyinfluenced by growth potential and replacement costreflects the intrinsic valuechanges frequentlyinfluenced by supply and demanddetermined by current market transactionsfor example a stock s market value can move up and down quickly depending on a variety of external factors but the fair value of a company changes much more slowly investors who know a company s fair value can use that to decide whether the market value of a stock is high which means it s a good time to sell or low which means its a good time to buy 