What is Market Value?
The Market Value of a company’s common equity is a function of the most recent price paid by investors in the open markets to purchase a share and the total number of diluted shares outstanding.
How to Calculate Market Value (Step-by-Step)
The market value of an underlying asset—the shares issued by a publicly-traded company that represent partial ownership in the issuer’s common equity—depicts not only the general perception by the financial markets on how much each share is worth, but the actual prices paid.
That said, the share price of a company is ultimately set by the market participants that engage in transactions in the open markets.
Thus, the market value per share fluctuates based on the current conditions and certain forward-looking factors, such as investor sentiment regarding the company’s outlook, the developing industry or secular trends of relevance, and the market’s perception of company fundamentals (e.g. profit margins, growth prospects, risk profile).
In addition, external factors like current market conditions and the economic outlook (e.g. fear of recession, Fed interest rate policy predictions) can also cause a company’s share price to fluctuate, which are out of the direct control of the company.
Market Value Formula
The formula to calculate the market value of equity is as follows.
When calculating the market cap, the common share count should be determined on a fully diluted basis, which refers to the inclusion of the effects of potentially dilutive securities like options, warrants, and convertible debt instruments.
The market value per share can be derived by rearranging the formula.
How to Interpret Market Value Per Share
One common use case of manually calculating the market value per share would be if the market capitalization were also calculated manually in a discounted cash flow model (DCF), as opposed to pulling the figure directly from a third-party resource.
The calculated market value per share can be compared to the actual share price to determine whether the company’s shares are currently undervalued, overvalued, or priced fairly by the market.
- Implied Share Price > Market Share Price → Undervalued
- Implied Share Price < Market Share Price → Overvalued
- Implied Share Price = Market Share Price → Fairly Valued
Book Value of Equity (BVE) vs. Market Value of Equity
The book value of equity (BVE) is the historical value of a company’s common equity recorded for purposes of bookkeeping, whereas the market value is more indicative of the current value of the company’s common equity based on recent transactions.
- Book Value of Equity (BVE) → Unlike the market value, the book value of equity is an accrual accounting metric (and thus reflects the historical value instead of the fair value). Conceptually, the book value of equity can be thought of as the residual value if a company’s assets were to be hypothetically liquidated to pay off its liabilities before the remaining proceeds are distributed to common shareholders.
- Market Value → The market value represents the fair value of a company’s common equity, which is based on the actual prices paid by buyers and sellers in the open markets. The market value is forward-looking and thus constantly fluctuates each trading day due to changes in investor sentiment and news surrounding the company, among various other factors. In practically all cases, the market value will exceed the book value of equity by a substantial margin, barring unusual circumstances.
Book Value Per Share (BVPS) vs. Market Value Per Share
The book value of equity and market value are frequently expressed on a per-share basis.
- Book Value Per Share (BVPS) → The book value per share is the book value of equity (i.e. shareholders equity) denoted on a per-share basis.
- Market Value Per Share → The market value per share is the price that reflects the fair value of each common share, which is determined by the most recent transactions that actually occurred in the open markets.