Market Price

A market price is a fact: the amount at which a buyer and a seller have just agreed to trade. It can be read from an exchange screen, a trade report or a dealer quote. Intrinsic value is different in kind. It is what the asset would be worth to an investor with a complete understanding of its characteristics, and because no one has that understanding, value can only be estimated. Two careful analysts can reach different estimates of value for the same share at the same moment, while the price is the same for both.

In notation, P stands for price and V for value, with a subscript for timing: P₀ is today's price and V₀ today's estimate of value. A model's output is always a value estimate. Treating it as the price erases the comparison that makes analysis useful.

Active investing rests on comparing the two. If an analyst's estimate of intrinsic value is above the market price, the asset appears undervalued and is a candidate to buy; if it is below the price, the asset appears overvalued. The gap is a perceived mispricing, because one side of the comparison is an estimate that may be wrong.

Whether the gap pays off depends on convergence. An undervalued share offers an expected return above its required return only if the price moves toward the analyst's value within the investment horizon. If markets are assumed to be in equilibrium, price equals value and expected return equals required return; that assumption has to be stated whenever one is substituted for the other.

Prices form wherever trading happens. On an exchange, the last trade and the best bid and offer give the current picture; in dealer markets, which handle most bond trading, prices come from quotes and can be stale for instruments that rarely trade. Market capitalization is the share price multiplied by the shares outstanding, and price multiples such as price-to-earnings put today's price P₀ in the numerator.

In accounting, fair value is the price an orderly market transaction would produce, and for actively traded shares it is usually the quoted price. Thinly traded assets need models or comparable transactions instead, which is why fair value measurements are grouped by how directly they rest on observed market prices.

Derivatives sharpen the distinction. A forward contract fixes a forward price at signing, the amount to be paid at delivery, and that price stays fixed until the contract expires. The value of the position, by contrast, starts at zero and drifts as the spot price of the underlying and interest rates move, becoming an asset for one side and a liability for the other.

Futures work differently because of daily settlement. The futures price changes every day, gains and losses are paid through margin accounts, and the contract's value returns to zero after each settlement. Candidates should be able to say which number is fixed and which moves for each contract type, and should never describe a valuation model as computing a price.