Fair Market Value Vs. Offering Price
Determining the appropriate price for an investment--for example, the price at which to buy a stock--is one of the most challenging tasks facing investors and investment bankers. They must analyze industries, competitors and economic conditions in order to make a determination.
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Fair Market Value
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Fair market value is the price that a stock would sell for in a financial market and should represent an accurate value of that asset. Fair market value is not set in stone; it may change over time and many vary based on opinions.
Offering Price
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When a private company goes public, it has an initial public offering (IPO) to sell stock. In order to do this, the company must find an investment bank to underwrite the IPO. The company and the bank determine the value of the stock, which is called the offering price. The offering price includes the bank value and other miscellaneous fees.
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The Valuation Challenge
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IPOs can be risky for investors. Since companies that issue IPOs are going through transitory periods, it's easy for investors to poorly assess the fair market value of a company in this situation.
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