The Concept Of Fair Value In Economy Over the years, economists and finance have developed different theories and concepts to study, analyze and understand the various economic and financial data and phenomena of individuals, institutions and countries. In the next Binary Option Club Review article we will talk about the concept of fair value, which is widely used both in macroeconomics, accounting or financial transactions defined by various financial markets.
Fair value in the general economy can be defined as the price of goods and services agreed between individuals who exchange goods or services among themselves. Which are determined by a combination of factors, such as the cost of raw materials entering the manufacture of these goods, the cost of conversion, manufacturing and transport, labor, in addition to the supply and demand. In accounting, fair value is defined as the rate at which a certain asset can be exchanged between two parties that have all the information equally and fair competitive conditions between the parties.
In contrast to general economics, the concept of fair value defines a sharp debate between economists and market experts as to how to determine the fair value concept of financial assets traded in global financial markets, particularly equity markets.
For example, if you ask a group of citizens in a city about the price of a consumer commodity, the answers you get will be very close. If you ask a group of people about the price of a cup of coffee, for example, you get one price or prices close to the real price of a cup of coffee. But if we ask a group of investors about the value of the shares of Binary Option Club Company, it will differ greatly from the situation already mentioned. Because you will get significantly spaced numbers because each investor has his own view and valuation of the company’s stock.
The concept of fair value in financial markets
You should know that there is a big difference between the price of the stock and the value of the stock. The price of the stock can be obtained by entering one of the international financial markets such as Bloomberg, Yahoo Finance or Google Finance, You want the site to give you the share price of the company, which will be the last price you made the last sale or purchase. A company’s stock is another. Perhaps the simplest definition of value is Warren Buffett, the famous American investor and the third richest man in the world: “The share price is what you pay and the value of the stock is what you get.”
Therefore, the price of the share and the value of the share are different. For example, if we assume that a company is trading on the stock market at the price of $ 10 (share price), but when studying and analyzing all financial statements of the company, such as cash flows, distributions Profit ratio, debt ratio, market share, and growth outlook … According to these data and due to the positive results achieved by the company we found that the share price should be between 20 and 25 dollars. This price represents the fair value of this company’s share.
Here, participants in financial markets can be divided into two main categories: speculators and investors. Speculators usually make trades ranging from a few days to several weeks, and rely on technical analysis, price action, and what other traders think about the direction of the price without giving any weight to the company’s financial situation and results in order to make a profit through Take advantage of the volatility known by stock market prices in the short term. While investors open positions lasting from several months to several years, depending on the company’s basic analysis ie, the company’s financial figures and results, as the revenue ratio, net profit, growth opportunities of the sector operating in the company, cash flows, expected growth rates over five years Coming in terms of market share, net profit and many other indicators. These investors are usually referred to as “value investors”. The objective of this category is to search for undervalued shares ie stocks that are traded at a price below their real value or the fair value of these shares and buy them in the hope of reaching their price to the price that represents the real value of these shares and then sell them and benefit from the price difference. In some other cases, some traders reverse this process, ie, look for stocks that are expensive, ie their current price is above their value and thus open short positions on these stocks and wait for their prices to fall to their real value.
Stock prices do not often reflect their true value as a result of speculative operations and also because the behavior of market participants is irrational. Most Binary Option Club traders do not make their decisions based on the actual information available but rather irrational decisions that follow herd behavior. Traders are always moving between two situations Extreme optimism and extreme pessimism.