fair value
The estimated intrinsic worth of an asset based on objective analysis, representing what a willing buyer and seller would agree to in an arm's-length transaction.
Example
“The analyst calculated a fair value of $150 for the stock, suggesting it was undervalued at $120.”
Memory Tip
Fair value = the FAIR (honest, unbiased) estimate of what something is worth.
Why It Matters
Fair value helps investors make informed decisions about whether an asset is overpriced or underpriced in the market. Understanding fair value allows you to identify investment opportunities and avoid overpaying for stocks, bonds, or real estate, which directly impacts your long-term wealth building.
Common Misconception
Many people confuse fair value with the current market price, assuming that whatever price an asset trades at must be its true worth. In reality, market price can be driven by emotions, speculation, or inefficiencies, while fair value represents what the asset should theoretically be worth based on fundamentals.
In Practice
If a stock is trading at 50 dollars per share but analysis shows its fair value is 75 dollars based on earnings potential and assets, an investor might view it as undervalued and buy. Conversely, if a house is listed at 500,000 dollars but comparable properties and rental income suggest a fair value of only 420,000 dollars, a buyer should negotiate down or look elsewhere.
Etymology
From Old French 'fair' (just, equitable) + Latin 'valor' (value, worth).
Common Misspellings
Start investing with no commission trades
Related Terms
More in investing
Other investing terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.