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Relationship Between Fair Value And Market Price

With respect on tradable assets, an efficient market hypothesis claims that in the well organized, sufficiently transparent market, a market price will normally be equivalent to or closest to a fair value. This is because investors will react fast to consider new information on relative scarcity, expected bid’s return and utility. An efficient market is one whereby all necessary transacting information is available to all the parties in question.

All trade information is made available to the stakeholders, so that no one takes secret advantage of trade news to the advantage of another. It can therefore be noted that the making of abnormal profits in not possible under the efficient market hypothesis. With respect on tradable assets, behavioral finance claims that the market price normally deviates from the fair value due to various, general cognitive biases by purchasers and sellers.

Although behavioral finance proponents basically acknowledge behavioral anomalies causing such divergence, it mostly acts so in unpredictable, difficult to note or chaotic style at the adequately profitable strategies for trading, more so in relation to transaction costs.

(Nandarkumar, 2007 p.15-24).

Fair value calls for the assessing of the amount which is fair for two particular parties while considering their particular advantages and disadvantages to

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be gained from the transaction by each party. Future cash inflows expected from the particular asset are necessary to be considered while undertaking the cost benefit analysis. Investors will be ready to spend amounts that are recoverable after the purchase of the said asset. The market value may at times meet the criteria.

However special  considerations need to be made, so that the demand and supply curve do not dictate much on what the transaction figure should be. Fair value is mostly applicable in understanding of due diligence when transacting at the corporate level. Corporate entities need to go beyond personal interests when making evaluations on the transacting figures to appear on the entities’ financial statements. This may call for experts’ valuations to determine the true figures for the transaction that may not prove costly to all the parties concerned.

Being unbiased in a transaction may result in the price that is fair, but is actually higher at the wider market. Market value may require this special value aspect being disregarded but it is actually a component of assessing fair value

 

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