30 SECOND GUIDE: Fair value

Updated: 04:38 EST, 10 October 2012

Tickets are getting expensive...

Yes, fares are pricey these days. But consider whether the expense of getting yourself from home to work is good value.

If you feel you’re being ripped off, then the cost of your journey can hardly be considered ‘fair’.

Fair value is the price at which both buyer and seller - who know the value of the transaction - know neither are being cheated

Go on

Fair value is an accounting term referring to the price paid by a buyer who knows the value of what he is buying from a seller who knows the value of what he is selling. In other words, neither is being cheated by the other.

So everyone’s happy?

That’s the idea of a free market, and fair value is particularly important at the time of a merger or an acquisition. In essence, is the amount for which an asset or liability could be exchanged between informed and willing parties fair?

Any other examples?

You often see stock brokers or City analysts refer to a share price being fair value.

For example, if shares in MegaCo plc are standing at 80p, but analyst John Brown reckons they are worth 20p more, he may say a fair value for the stock is 100p.

Why the difference then?

The difference is that while Mr Brown thinks he may have seen something in MegaCo that means it is worth more than its current stock market value, the wider market does not agree, and so the shares are priced accordingly.