How does market value work in stock trading

The market value is one of the most fundamental concepts every investor must understand. It is the price that buyers and sellers jointly set at any given moment in stock markets, regardless of whether we operate on Wall Street, the Madrid Stock Exchange, or Milan. This consensus price sets the tone for any asset transaction.

The origin of price: from barter inefficiency to the Law of Supply and Demand

Before money existed, exchanges were based on direct barter. A baker could trade a loaf of bread for a certain amount of lettuce, but this generated obvious inefficiencies. What happened if the baker didn’t want lettuce? How was negotiation handled when local supply of a good was excessive?

Money solved this problem, allowing any good to have an equivalent in monetary units. But it was the Law of Supply and Demand that determined the final market value of each asset. This value results from the constant confrontation between what buyers are willing to pay and what sellers are willing to accept.

In the case of stocks, the mechanism is identical. The market value of a stock is simply the price that reflects this balance between buyers and sellers at the moment of the transaction.

Can I set the price myself?

Technically yes, but with a crucial limitation: you need to find a counterparty willing to transact at that price. If a stock is trading at €16 and you try to sell it at €34, you probably won’t find a buyer. Similarly, offering €12 when the market asks for €16 won’t generate trades either.

The market acts as a meeting point between positions, generating a reference price that makes exchanges viable. Without this consensus, negotiations simply do not happen.

Liquidity: the decisive factor for proper operation

Liquidity is the element that distinguishes a viable investment from a potential trap. A stock with high trading volume allows your orders to be executed quickly and orderly at the market price. However, securities with low volume pose significant risks.

When a stock shows spectacular revaluation but with minimal trading, three scenarios can occur: the trade doesn’t go through, the seller gets an unrealistic price, or the buyer achieves an unjustified gain. The real danger is that these movements attract unwary investors who get trapped in illiquid positions.

For this reason, it is crucial to operate only on assets with respectable volume. Stocks like BBVA have immediate counterparties; others like Urbas hardly do. More sophisticated instruments like private equity or unlisted debt exhibit severe illiquidity at liquidation.

Primary market versus secondary market

These concepts often cause confusion about where the market value is actually determined.

The primary market is where companies, governments, and organizations issue original securities. The money goes directly to the issuer, either through direct placement (pre-agreement) or indirectly (with intermediaries). The securities here are “new.”

The secondary market is where investors trade previously issued securities with other investors. The assets here are “used.” It is precisely in this market that the market value we are interested in operates.

The relationship between market value and stock market capitalization

Market capitalization represents the total value the market assigns to a company at any given moment. It is calculated by multiplying the value per share by the total number of shares outstanding.

Market capitalization = Share price × Total shares

Conversely, if we know the market capitalization and the number of shares, we can derive the individual price:

Value of a share = Market capitalization ÷ Total shares

Brokers automatically display these values on their platforms. It is relevant to note the difference between Bid (selling price) and Ask (buying price), whose difference is called the Spread and represents the implicit commission of the intermediary.

Do all assets have a market value?

Not necessarily. Liquidity is the determining factor. An asset without an active market lacks a useful reference price. Shares of large companies have immediate counterparties; many small companies do not. Unlisted instruments like private equity can produce unpleasant surprises when trying to liquidate.

Liquidity simply refers to the ease of converting an investment into cash. Even if an investment guarantees extraordinary returns but is illiquid for five years, it can be problematic if you need capital earlier.

Three different ways to value a stock

There are at least three different valuation models that are often confused:

Net book value: Based on the book value, calculated as assets minus liabilities divided by the number of shares outstanding. Value investors often look for discrepancies between this value and the market price.

Nominal value: The original issuance price of the stock, determined by dividing the share capital by the number of shares issued. It serves as an initial reference but loses relevance over time.

Market value: Results from the actual interaction between supply and demand. It is dynamic and reflects current market expectations about the company.

The fundamental problem: efficiency versus reality

The market value is inherently inefficient. It does not always reflect the true value of a company. Speculative bubbles clearly demonstrate this: investors buy assets simply because their prices rise exponentially, without truly understanding why.

The case of Terra exemplifies this phenomenon. It initially traded at €11.81 and reached €157.60 in less than a year, driven more by internet fervor than real fundamentals. Years later, it was absorbed by its parent company Telefónica and finally disappeared in 2017.

Gowex presents an even more disturbing example. The company boasted spectacular results as a supposed global Wi-Fi provider. When US investigators conducted detailed analyses, they discovered it was a large scam. The CEO lied about business viability, and investors suffered massive losses when they realized that the rising market value reflected systematic fraud.

These examples illustrate why simply following the market value can be dangerous without parallel fundamental analysis.

Conclusion: theory versus practice in the current context

Understanding the market value is essential, but it must be complemented with analysis of the theoretical accounting value. After years of low interest rates and lax policies by central banks, the current environment favors value strategies over growth. This means that the steady flow of income, recurring expenses, and other fundamental factors regain importance compared to promises of future income.

The prudent investor considers the market value as an operational reference, but not as the sole decision-making factor. Liquidity, accounting fundamentals, and critical analysis should always accompany any investment decision.