Glossary
Fair value
An estimate of what an asset is really worth based on its fundamentals, which may differ from its current market price.
On this page
Fair value is a reasoned estimate of what an asset is worth, as opposed to the price it happens to trade at today. Analysts arrive at it from cash flows, earnings, assets or comparable deals, and then compare it with the market price to judge whether a stock looks expensive or cheap. The phrase also has precise, narrower meanings in accounting and in futures trading, which is a common source of confusion.
Three uses of the term
1. Investment analysis. Here fair value is close to intrinsic value: the present value of what the business is expected to earn. A discounted cash flow model or a peer multiple produces a number, and different assumptions produce different numbers.
2. Accounting. Under US GAAP (ASC 820), fair value is the price that would be received to sell an asset in an orderly transaction between market participants. Companies disclose a three-level hierarchy: Level 1 uses quoted prices, Level 2 observable inputs and Level 3 unobservable model inputs, which deserve the most skepticism.
3. Index futures. Before the open, TV tickers show stock index futures "above" or "below" fair value. That fair value is a theoretical futures price: the index level adjusted for interest cost and expected dividends until expiry. It says nothing about whether stocks are cheap.
What to watch for
A fair-value estimate is an opinion with a range around it, not a fact. Treat precise targets with caution, check the assumptions, and compare several methods before relying on any one.