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Finance GlossaryFair Value
Fair Value
Definition of Fair Value
The fair value of a stock, product, or service is the price at which the buyer and seller willingly agree on without being on the losing end of the deal. Think of fair value as a win-win situation for both parties, assuming that all conditions are normal.
Say Mr. Apple is offered to buy shares of Mr. Orange’s company at Rs. 1000 per share. Mr. Apple evaluates the business and figures out that he can sell the same shares for Rs. 1200, even though Mr. Orange is content to sell the shares at Rs. 200 lower. Both parties agree on the deal at Rs. 1000 because both view it as a good deal.
The formula for the fair value of a stock or index is:
Fair Value = Cash * { 1 + r (X / 360)} - D
Where,
Cash = Latest stock or index value
r = interest rate on purchase
x = number of days to contract expiry
Dividend = Dividends
The definition of fair value is slightly different in the futures market. In the futures market, the fair value is reached when the supply meets the demand, which simply means that the spot price is equal to the futures contractprice.
However, due to inherent volatility of the markets, the price of a futures contract is known to fluctuate around the fair value of a stock or index. Thus, in the fair value in the context of futures is what the price of the contract should be, given the value of the stock or index, dividends, and others.
Say Mr. Apple is offered to buy shares of Mr. Orange’s company at Rs. 1000 per share. Mr. Apple evaluates the business and figures out that he can sell the same shares for Rs. 1200, even though Mr. Orange is content to sell the shares at Rs. 200 lower. Both parties agree on the deal at Rs. 1000 because both view it as a good deal.
The formula for the fair value of a stock or index is:
Fair Value = Cash * { 1 + r (X / 360)} - D
Where,
Cash = Latest stock or index value
r = interest rate on purchase
x = number of days to contract expiry
Dividend = Dividends
The definition of fair value is slightly different in the futures market. In the futures market, the fair value is reached when the supply meets the demand, which simply means that the spot price is equal to the futures contractprice.
However, due to inherent volatility of the markets, the price of a futures contract is known to fluctuate around the fair value of a stock or index. Thus, in the fair value in the context of futures is what the price of the contract should be, given the value of the stock or index, dividends, and others.
Related Terms
Long-Term Stocks
Long-term stocks are shares of companies that investors hold for three years or more with the intention of getting lucrative returns combined with solid future prospects. Long-term stocks are typically chosen based on fundamental analysis, including factors such as the company's financial health, growth potential, competitive advantage, and industry trends.
Derivatives Market
The derivatives market is a place where financial contracts like futures, options, forwards, and swaps are traded. It is a complex market that is a subset of the stock market, commodity market, currency market, and others depending on the underlying asset that’s a part of the derivative contract.
Capital Gains Exemption
Capital gains exemption is the tax break that a government offers on profits earned by selling assets. Generally, an investor must pay a tax on the short-term capital gains or long-term capital gains earned.
But in certain cases, the government allows investors to offset taxes. For example, if an investor sells property and reinvests the entire amount back again into another property, they can avail of capital gains exemption.
But in certain cases, the government allows investors to offset taxes. For example, if an investor sells property and reinvests the entire amount back again into another property, they can avail of capital gains exemption.
Gravestone Doji
A Gravestone Doji is a candlestick pattern that signals the reversal of a bullish trend into a bearish one. The key marker of a Gravestone Doji pattern is the open, low, and closing prices being near to one another.
This is a price action type trading strategy that is formed with a tall upper shadow, which is a signal of a bearish reversal.
This is a price action type trading strategy that is formed with a tall upper shadow, which is a signal of a bearish reversal.
Institutional Investor
Institutional Investor refers to the often illegal act of trading shares based on information that is not publicly available, typically obtained through dubious sources.
This privileged access to confidential information is termed “Institutional Investor” because information is generally sourced through insiders or employees working at a publicly traded firm.
This privileged access to confidential information is termed “Institutional Investor” because information is generally sourced through insiders or employees working at a publicly traded firm.
Annual Net Profit Margin
A Net Profit Margin is the ratio of a company’s net profits to revenues. The formula to calculate Net Profit Margin is:
Net Profit Margin = Net Profit* / Revenue * 100
*Net profit = Revenue - Cost of goods - Operating Cost - Other Expenses - Interest - Taxes
Net Profit Margin is expressed as a percentage, which means that you can compare the financial health of multiple companies.
A company can use its Net Profit Margin to understand whether its strategies and business models are effective.
Net Profit Margin = Net Profit* / Revenue * 100
*Net profit = Revenue - Cost of goods - Operating Cost - Other Expenses - Interest - Taxes
Net Profit Margin is expressed as a percentage, which means that you can compare the financial health of multiple companies.
A company can use its Net Profit Margin to understand whether its strategies and business models are effective.
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