How Is the Fair Market Value of Stock Determined?
A stock's fair market value is the price at which it would change hands in a trade in which neither party is compelled to participate and both have equal access to information about the stock. Determining that value depends on the type of stock.
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Significance
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Determining fair market value, or FMV, is important for tax purposes. If you receive stock as compensation from a company, you will owe taxes based on the FMV of the stock. When you donate stock to charity, you can deduct FMV on your taxes.
Types
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Stocks are either publicly traded, on an exchange such as the New York Stock Exchange or the Nasdaq, or privately held. It's easy to determine FMV for the former, harder for the latter.
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Identification
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For a publicly traded stock, simply look at its activity on the stock exchange. The FMV on any given day is the midpoint between the highest- and lowest-selling prices on that day. For a privately held stock, you need to look at recent transactions between unrelated buyers. If there are no such sales, or not enough to get a real sense of the value, you can estimate the value of the company and divide by the number of stock shares outstanding to find the FMV of each share.
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