What it is
In investing, fair value is the “real worth” of an asset based on an objective, facts-based judgment. Analysts and investors use different methods to determine fair value.
With stocks, fair value is typically calculated based on factors like earnings, cash flow, and growth prospects.
What it means for you
When people say a stock is overvalued or undervalued, it means they are comparing its current price with its perceived fair value.
Knowing the fair value of an investment can help you decide whether it’s a good idea to buy it at the price it’s trading for.
Some investors follow an approach called value investing. This involves buying stocks that are trading below their fair value to possibly make a profit once prices rise to reflect their “true” worth.
Since there are various methods to determine fair value, people may calculate it differently. There’s also no guarantee that an asset’s price will end up reflecting an estimated fair value.
You can instead use this number as a guide to avoid investing in overhyped assets or spot potential buying opportunities.
