What Is A Fair Market Value, Really? If Youre Going To Trade, Be Sure Its Worth It!

I've been involved in online trading, specifically with stock and index options, for several years. In this time, I've spent a great deal of time thinking about value and the fact that anything, be it a stock or currency or even a house, is worth exactly whatever someone else will pay for it. Sure, there are a million and one pricing models (especially in financial markets) that will tell you precisely what something should be worth. But in the final analysis, if nobody will pay that much, then it's not actually worth that price.

Let's illustrate this concept in a very simple fashion. I'm an American so I'll use U.S. currency to make my point.

What is a $20 bill worth? Without over thinking it and talking about inflation, exchange rates, etc. let's just say that it is generally believed to be worth $20.

Would you pay me $20 for a $20 bill? I'm going to guess probably not, as there would be no real reason to do so. You would have to go to the trouble of getting me your $20 and I would have to go to the trouble of giving you my $20 bill, and neither of us would be in a better position than we were before. Therefore, I would like to present the idea that a $20 bill is not actually worth $20 since nobody would likely pay $20 for it!

So how much would you pay for a $20 bill? Would you pay $19.99? Is it worth the effort for 1 cent? No? How about $19.50? $19? Shall I keep going?

In a free and fair market it is the market itself which determines value, and given a large enough market, that value should be fairly accurate. I read an article online some time ago about someone who decided to conduct an experiment just for fun. He put a new $5 bill up for auction online and began the biding at 1 cent. He crafted a creative description of the note, and waited to see the results. When it was all said and done, the bill did in fact sell - for slightly over $3. He then spoke with the winning bidder, who said he had made a profit many times online by purchasing currency for less than face value (including a $20 bill for less than $10 as I recall).

The conductor of the experiment left it at that - nothing more than a somewhat humorous exploration into what people think something is worth. But to me this meant so much more.

A dollar is not actually worth a dollar... so what is it worth? What would you trade for $1? For $20? For $100? $1,000? And if a dollar isn't actually worth a dollar, is a share of stock worth $50, or in fact anything at all?

The answer is yes. At any given moment it is worth precisely what someone is willing to pay for it. No more, no less. Money and value are merely ideas, they are not absolutes.

Consider this carefully the next time you are convinced that the stock, option, currency, house, or anything else you want to buy, is worth what you're about to pay.

Jonathan van Clute is a full time investor, educator, speaker, and online options and sports arbitrage trader. In addition to his business activities, he is also a musician, video editor/animator, and one of the world's greatest Segway Polo athletes. He can be reached via email at jonathan@PMLinvestments.com and is speaking at an upcoming teleseminar, visit http://www.snurl.com/vcfmv for details.

Merck Investors Can Sleep Easier (Not Easy) DailyFinance By Brian Orelli, The Motley Fool Posted 3:34PM 02/06/12 Investing Merck (NYS: MRK) said today that its insomnia drug suvorexant had passed two phase 3 trials, putting it on track for an FDA filing this year. But that doesn't mean investors can sleep ... and more »

Investments for Income Lovers Motley Fool With interest rates at historical lows, folks are having a hard time squeezing any meaningful income out of their investments. While you don't want to go out too far on a limb in search of higher yields, there are some steps you can take to boost your ... and more »

Your Most Important Investing Decision of the Next 10 Years TheStreet.com And these are some of the most boring companies you can think of -- real-state investment trusts (REITs), pipeline operators and cigarette makers. But they all have one thing in common. As the chief investment strategist behind High-Yield Investing, ... and more »

Ask the Experts: What looks attractive for investors? Kansas City Star By CLAUDIA BUCK With the economy starting to perk up, investors are wondering where they should be looking next. Here with some recommendations is Glenn Kenes, managing director of investments with Barber-Kenes Capital Management Group in Auburn, ... and more »

J.D. Power and Associates Recognizes Merrill Edge(R) Call Centers for Customer ... MarketWatch (press release) For customers who prefer to invest on their own, Merrill Edge provides an online self-directed investing platform, with robust tools and resources to help them make informed investment decisions. "This designation acknowledges the strong commitment ... and more »

Investing mistakes even the pros make Sydney Morning Herald The best investors learn from their mistakes over time. And because I've made plenty of mistakes during my career, I'll optimistically say that means I've had lots of room for personal growth. Lucky you, then, for being able to learn from some of the ... and more »

TD Ameritrade Investor Poll: Younger Investors More Likely to Invest "More" in ... MarketWatch (press release) OMAHA, Neb., Feb 06, 2012 (BUSINESS WIRE) -- The European debt crisis, US unemployment, the housing market, and political uncertainty - a laundry list of issues that may be causing investors to think more cautiously about their financial futures. and more »

3 Dow Stocks That Jumped in a Down Market DailyFinance By Dan Caplinger, The Motley Fool Posted 7:06PM 02/06/12 Investing The stock market may have been down today, but things could have been worse. After falling nearly 70 points in early trading, the Dow Jones Industrials (INDEX: ^DJI) recovered to finish ... Investing In The Dogs Of The DowSeeking Alpha all 12 news articles »

Stockopedia

Are your investments at risk? 3 useful Red Flags: Altman, Beneish and Piotroski Stockopedia Warren Buffett's rule #1 of investing is “Don't Lose Money" while rule #2 is “Don't forget rule #1.” As with most Buffet aphorisms, though, the devil is in the detail of implementation. Clearly, though, one important way to prevent yourself losing ... and more »

Freedom Investing 2012 Forbes I've been discussing foreign freedom investing for a decade now. In the spring of 2010, I used the term “Ring-of-Fire” to describe countries with a high debt and deficit and suggested avoiding them. A year later, I revisited that advice and counseled ... and more »