Market Value: The Key to Understanding How Assets Are Traded

What is the market value of a stock really? This fundamental question accompanies every investor, from beginner to seasoned. Essentially, market value represents the price established at any given moment by the interaction between buyers and sellers in the stock markets. It is not an arbitrary number, but a reflection of a dynamic balance between supply and demand.

The Genesis of Price: From Barter Inefficiency to the Law of the Market

To truly understand what market value is, it is helpful to understand how the need to establish universal prices arose. In primitive direct exchange systems, setting equivalencies was chaotic. Without a common measure, a baker could receive ten lettuces, a rake, and three flowerpots in exchange for his loaves, when he actually needed wheat grains.

Money solved this problem, but it was the Law of Supply and Demand that established how prices are actually determined. Under this fundamental law, the market value of any asset—including stocks—emerges from the tension between what buyers are willing to pay and what sellers are willing to accept.

Can I Set My Own Prices When Buying or Selling?

Technically yes, each investor can set the price at which they wish to negotiate a stock. However, setting a price does not guarantee finding a counterparty. If a listed company like “ABC” has a market value of 16 euros per share and a shareholder tries to sell at 34 euros, they will hardly complete the transaction. Similarly, offering 12 euros when the market sets 16 euros also does not result in a trade.

The market acts as a neutral arbiter, indicating the price range where exchanges are likely to occur. This consensus of prices allows thousands of transactions to be executed daily on major exchanges—from Wall Street to Madrid or Milan.

Liquidity: The Essential Requirement for Proper Investing

A critical factor many investors forget is liquidity. It is not enough for an asset to have a price; there must be sufficient trading volume for that price to be reliable and for orders to be executed without delays.

It is common to see certain stocks experience spectacular rises, only to discover that the traded volume was minimal. When liquidity is low, three problematic scenarios can occur:

1. The trade does not cross and the transaction simply does not happen
2. The seller manages to impose their high price due to a scarcity of counterparts
3. The buyer obtains an artificially low price for the same reason

These extreme movements attract unwary investors who do not understand they are operating in a “liquidity trap.” The fundamental rule is simple: always trade assets with respectable volume that guarantees orders will cross quickly and orderly.

Primary Market vs. Secondary Market: Where Is Value Formed?

Two concepts often confused but essential to understanding the market value: the primary market and the secondary market.

The primary market is where securities are born. Companies, governments, and organizations issue new stocks or bonds, receiving capital directly in exchange. Here, direct placements (pre-existing agreements between issuer and investors) and indirect ones (with financial intermediaries) are involved.

The secondary market is subsequent. In it, owners of already issued securities trade among themselves. This is the space where traditional exchanges operate and where the market value that truly matters to the average investor is formed. Here, millions of “used” asset exchanges occur, generating the dynamic prices we see on our trading screens.

Market Value and Capitalization: The Inseparable Relationship

The market value of a stock is inexorably linked to the company’s market capitalization. Knowing one allows you to calculate the other.

Market capitalization represents the total value the market assigns to the entire company at a given moment. It is calculated using a simple formula:

Market Capitalization = Stock Price × Total Number of Shares

From this relationship, the individual market value is derived:

Market Value per Share = Market Capitalization ÷ Total Number of Shares

It is important to note that market capitalization does not always reflect the company’s true book value. Both can differ significantly depending on economic conditions and market expectations.

Automatic Calculation vs. Bid-Ask Difference

Fortunately, investors do not need to perform these calculations manually. Brokers and trading platforms automatically display the real-time market value.

However, it is crucial to understand the difference between two terms that appear constantly:

• Bid (Buy Offer): The price at which you can sell an asset
• Ask (Sell Offer): The price at which you can buy an asset
• Spread: The difference between the two, representing the implicit commission of the intermediary

These spreads vary depending on the asset and the available liquidity at any given moment.

Do All Assets Have Market Value?

The answer is unequivocally no. Liquidity is the determining factor.

Stocks like BBVA have immediate counterparts—finding a buyer or seller is practically instant. But less traded stocks like Urbas present greater difficulties. And when it comes to sophisticated assets like private equity or non-listed debt, liquidity virtually disappears, making clear valuation or quick exit impossible.

An intelligent investor always considers: will I be able to unwind this position when needed? The market provides the answer through the available liquidity.

Three Ways to Value: Nominal, Book, and Market

There are three different valuation methods that generate different prices for the same stock:

Nominal Value: The original issuance price, calculated by dividing the share capital by the number of shares issued. It serves as a historical reference point but diverges dramatically from market value over time.

Net Book Value: Based on the company’s balance sheet (assets minus liabilities, divided by the number of shares issued). “Value investors” look for opportunities here, believing the market will eventually recognize the true value.

Market Value: The actual convergence of supply and demand. The higher the demand, the higher the price. The greater the supply, the lower the price. This is the visible price, determined daily by thousands of transactions.

Market Inefficiency: Bubbles and Disconnection from Reality

Here arises an uncomfortable question: is the market value truly efficient? The honest answer is that it is not always.

Market value often does not reflect the underlying real value of a company. Investors tend to follow speculative trends, buying because “the price goes up” without truly understanding why. This behavior fuels speculative bubbles.

Two Spanish cases clearly illustrate this:

Terra: This Spanish company was announced on prime-time TV as a “successful stock market business” during its spectacular rise. Its stock went from 11.81 euros to 157.60 euros in less than a year, mainly driven by internet speculation frenzy, not solid business results. Three years later, it was absorbed by its parent Telefónica, and in 2017 it disappeared entirely. The market value was pure illusion.

Gowex: This company boasted spectacular results as supposedly one of the world’s largest WiFi providers. However, its financial statements were fabricated. When a U.S. analysis by Gotham Research exposed the truth, the market value plummeted. Its CEO had lied about the company’s viability, and investors discovered they had paid for a monumental scam.

These cases demonstrate that blindly trusting market value can be catastrophic.

The Current Context: Paradigm Shift in Valuation

After a decade of low interest rates and excessively lax monetary policies by central banks, the environment has changed radically.

This transformation directly affects how market value is formed. While in recent years the focus was on “growth” stocks (tech and biotech companies promising future profits), today the market seeks “value” companies with consistent income and controllable expenses.

Market value now penalizes companies that generate losses today with the promise of profits tomorrow. For cautious investors, this means studying net book value and real cash flows is more important than ever.

Conclusion: Understanding the Complexity of Value

Market value is both simple and complex. Simple because its definition is clear: the price set daily by buyers and sellers. Complex because its interpretation requires understanding that it does not always reflect the underlying economic reality.

To invest wisely, it is necessary to go beyond the observable market value. Understanding available liquidity, comparing multiple valuation methods, analyzing business fundamentals, and maintaining skepticism toward speculative movements are essential skills.

Market value is a fundamental tool for participating in financial markets, but it must be used wisely, recognizing both its utilities and inherent limitations.