In finance, you frequently encounter the concepts of market value vs investment value. The two terms may seem synonymous, however, there are some critical differences between them. In this article, we look at each concept and discuss the key differences between them.
Market value is the price that is currently offered for an asset in the marketplace. In other words, the market value is a reasonable estimate of the investment’s value that reflects current market conditions.
Conversely, investment value is a concept that describes the value that an investor is willing to pay for the asset or investment based on his or her own objectives and parameters. Essentially, the investment value is a subjective judgment of an asset’s value.
What is Market Value?
Market value is the price that is currently offered for an asset in the marketplace, which reflects current market conditions. Essentially, market value is an objective estimate of the asset’s value in the given market conditions.
The calculation of market value may vary among different assets. For example, the market value for liquid assets such as equities or futures can be easily found using the quotes on the exchanges where the securities are traded.
Conversely, illiquid assets such as real estate do not have the same kind of obvious price point. Thus, the true market value of such assets is usually determined by appraisal professionals. They conduct research on an asset, as well as consider current market conditions, to identify a reasonable market value.
What is Investment Value?
Investment value is the value that an investor is willing to pay to obtain an asset or investment. It is based on the individual’s subjective goals, criteria, and opinion about the asset, and it does not always reflect the asset’s true value.
Investment value is a metric that investors use to make investment decisions. In identifying investment value, investors generally consider several criteria, including, but not limited to, return on investment, their investment strategy, and risk levels. In addition, investors also may make forecasts of market conditions that can have a significant impact on the asset’s value.
The calculation of investment value is a challenging process that usually combines both art and science. Each investor must carefully assess his or her own objectives, market conditions, and factors attributable to the investment to come up with a quantified investment value. There are a number of different methodologies for calculating the investment value. The most notable of these methods include comparable analysis and the discounted cash flows (DCF) model.
CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst. To keep learning and advancing your career, the following CFI resources will be helpful:
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