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Fair market value

Fair market value is the price an asset would sell for in the current market.

Expanded Definition

The markets are all about sellers and buyers coming to agreement on the price of something. A price is one way to measure value.

Fair market value (FMV) is an estimate based on what's been happening with sales of similar assets or items. For instance, your house might have a FMV of $800,000 when the economy is good and deals are routinely being sealed at that amount for similar homes in similar areas. But FMV for that house could drop if the economy changes, and it becomes the norm for buyers to offer less and sellers to accept less for similar properties. Or FMV could go up if the economy swings into higher gear. There could be many factors affecting the FMV of real estate in one area.

FMV matters in this instance because the fair market value factors into a property's assessed value, which is the basis for property taxes .

A calculation of FMV is based on up-and-up transactions where both buyer and seller are informed parties acting in their own interests. Fair market value also enters the equation when stocks are gifted.

The method of determination varies with the asset. For securities, the usual value is the price of recent trades. In the case of a mortgage loan, it is determined by appraisal.

An area of special concern is the value of securities of a private corporation. The shares are not publicly traded. Hence estimates of fair market value tend to be based on assets, earnings, and comparable properties. But one can always argue that if publicly traded a well managed company may be worth much more. This can be a reason successful companies IPO even though they are not in need of capital to fund their growth.

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