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What is the difference between Fair Value and Market Price?

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Since there are several methods possible for the valuation of a company there is a distinction that has to be made regarding what value actually is.
There are two main ideas and notions concerning what value is in the commercial and corporate world regarding valuation.

The first is commonly called Fair Value:

Also known as the fundamental criteria, this value is estimated by discounting earnings, current cash flow and various other forms of income that the business can bring to the purchaser in the future, which is then given a final estimated value after the plausible risks to the company have been brought into consideration.

The second is commonly called Market Price:

Also known as market criteria or potential price, this value is most often reached by the estimation of another criteria separate from the fair value. This definition of value is concerned with the behavior of the market and how possible events in the future of the marketplace may lower or higher the overall value of a company.

As such, a quick distinction can be made between these two notions regarding financial assets and the subsequent estimation of a business: fair value is concerned with what the business actually is and market price is most often concerned with what it will be.

Sometimes in an efficient market, these two are close to or even equal to one another in regards to rational pricing. However, there are many things that can affect the market price of a business that have little or nothing to do with the actual value, such as biases.

Next Page: With all this talk about value, what are the determinate factors within the definition of value?

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