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Fair value

Fair value refers to a relationship between stocks and stock futures. Alternatively, in the realm of value investing, fair value is a synonym for intrinsic value.

Expanded Definition

Fair value deals with the difference between the cost of owning all the stocks in an index such as the Dow Jones Industrial Average (DJIA) or S&P 500 and owning futures in the index. Owning all the stocks would cost a lot of money, that likely would have to be borrowed (for a price), but also would bring you dividends from the individual companies paying dividends. Owning futures would likely cost less, but earn you no dividends. Determining the 'fair value' relationship takes these factors into account.

Traders can profit if they know the difference between 'fair value', spot price, and the price of futures. Calculations of fair value are also used by some to predict whether the market will open up or down the next day.

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