Fair value definition

Fair value is an estimate of what an asset or liability is genuinely worth in an orderly transaction between a willing buyer and seller. It aims to reflect a reasonable, unbiased value under current conditions rather than a quoted price.

Fair value is derived from the market prices of comparable assets, discounted cash flow forecasts, or other valuation models and assumptions. Accountants, analysts, and dealmakers use it in financial reporting, investment analysis, and mergers and acquisitions.

Fair value differs from market value, which is the actual price the asset trades at right now and can swing on sentiment, liquidity, or short-term volatility. It is also distinct from mark to market, the practice of revaluing a position to its current market price; fair value is the estimate, mark to market is the act of restating the books to it.

Fair value Example

An analyst estimates the fair value of a stock at USD 50 per share.

The stock currently trades at USD 42.

Because the market price sits below the fair value estimate, you may judge the stock undervalued and worth a closer look.