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.

---

Time is Money and We Are Running Out of Both!

One of the fundamental principles of finance is the concept... Read More

Do You Need A Financial Planner?

No matter how much money you make, it pays to... Read More

Types of Investment

The word 'investments' is one that most of us are... Read More

Trading Systems

A trading system consists of a set of rules for... Read More

Porters Five Forces Analysis

If you've ever listened to Warren Buffett talk about investing,... Read More

Six Principles of Successful Investing

1. Begin investing immediatelyProcrastination is the number one enemy of... Read More

Why You Need To Buy and Sell Gold Coins (Part 3)

Putting Rare Coin Market Cycles to Work for You...Until recently... Read More

Critical Options Investing Tip When Trading Naked Calls and Puts

An option is a derivative trading product that is best... Read More

Retirement Plan Considerations Cheat Sheet for Small Business

RETIREMENT PLAN CONSIDERATIONS are something every small business person needs... Read More

Trend Following

Trend following also called momentum trading is the simplest and... Read More

Risk and Reward

If you are doing your own investing in the stock... Read More

Retirement ? Its Sooner Than You Think!! (Honestly)

Many people hear "retirement" and think- what? 401K? Roth vs.... Read More

Will a Falling Dollar Derail Your Plans for Retirement?

How much are you willing to pay for a tank... Read More

Delist My Corporation Please

It use to be said that once a company was... Read More

Penny Stock Investing

The Nature of Penny StocksFor anyone new to investing in... Read More

5 Things To Know About The Stock Market

50% Of U.S. Households Invest In The Stock Market Individuals... Read More

Day Trading the SP Futures with Initial S/R and the NYSE TICK

For instance, if the market moves up in the first... Read More

An Economical Retirement Investment Plan

The practice of economy, directed toward a retirement investment plan... Read More

Why You Need To Buy and Sell Gold Coins (Part 6)

Pre-1933 Gold Outperforms Today's Gold Bullion...Since 1970, an investment strategy... Read More

Forex market offers opportunity and information

The forex market is what is called an international exchange... Read More

Trading Is Not Rocket Science!

Despite what some people may lead you to believe; day... Read More

Numismatics are for Collectors, Not Investors

As a precious metals investor, you may heard much about... Read More

Easily Finding A Good Stock

There is a tremendous amount of software, complicated high priced... Read More

California Deparment of Corporations and Franchise Opportunities Law

What CA Needs To Do To Address Issues in FranchisingWe... Read More

Asset Allocation: Critical to Your Investment Success

Asset allocation is a critical component of investing success. Both... Read More

Looking For a Safe Investment? Try a Certificate of Deposit

If you are looking for a safe investment and you... Read More

Retirement is Never Urgent Until

If you're like many people, your retirement savings have not... Read More

Reasons For Joining An Investment Club

Whether you're a novice investor or an experienced stock picker... Read More

Selecting Rules for Investing and Trading

There are three important differences between investing and trading. Overlooking... Read More

Index Trading Weekly Update

Here is a sample of the last newsletter:SP500 Last Signal... Read More

Poll Names Coin Laundries Best Investment For 2005

According to Morton Pollack, CEO of PWS, The Laundry Company... Read More

Retirement or Financial Freedom?

In the past most people never retired. They died. The... Read More

Finding the Perfect Company

The perfect company - it's the holy grail of the... Read More