How the Market Value Works in the Stock Market: What Every Investor Should Know

What Really Determines the Price of a Stock?

When we observe the quote of any stock on the exchange, what we are seeing is the result of a simple yet powerful process: the confrontation between those who want to buy and those who want to sell. This consensus price is what we call the market value of a stock, and it is the most important metric we will find daily in any stock market, whether in New York, London, or Madrid.

The concept is not complicated: market value is precisely that, the value assigned by the market at any given moment. It doesn’t matter what the “real value” is according to accounting books or what an analyst thinks; what matters is what other investors are willing to pay at this instant.

From the Inefficiency of Barter to the Efficiency of Price

To understand why market value exists, it is helpful to trace back to the origins of exchange systems. In ancient times, when barter was the dominant system, obvious problems arose: how many lettuces were equivalent to a chicken? How many cowhides justified a tapestry? There was no common reference.

The creation of money solved this problem. Suddenly, all goods had a universal equivalent, enabling more efficient exchanges. However, even with money, the price of each good remained the result of the Law of Supply and Demand: the price is set at the point where the quantity buyers want to purchase exactly matches the quantity sellers want to offer.

In the stock market, exactly the same occurs. The market value of a stock emerges from the encounter between demand (who wants to buy and at what price) and supply (who wants to sell and at what price).

Can I Set the Selling Price I Want?

Technically, yes. Any investor can place a buy or sell order at the price they choose. The problem is that no one is obliged to accept it.

If a stock is trading at 16 euros and I try to sell it at 34 euros, probably no one will buy it, and my order will remain unexecuted indefinitely. The opposite is also true: if I try to buy at 12 euros when the market asks for 16, I will also find no seller.

The market acts as an arbiter that establishes the reference price. In this context, the market value of a stock constantly reflects the expectations of all participants about what that asset should be worth.

Liquidity: The Invisible but Critical Factor

This is one of the greatest dangers for unwary investors. Occasionally, certain securities make headlines for experiencing spectacular rises in a short period. When examined in detail, it is found that the trading volume was negligible: there were hardly any buyers or sellers.

When liquidity is low, three things can happen: the trade may not go through at all, the seller may succeed in selling very expensively, or the buyer may succeed in buying very cheaply. Price movements in illiquid assets are fictitious, mere optical illusions.

That’s why it is essential to work only with assets that have respectable trading volume. This guarantees that:

• Prices truly reflect market consensus
• Orders are matched quickly
• You don’t get trapped with positions impossible to close

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

These terms can be confusing, but the distinction is crucial.

Primary Market (or issuance market): It is where companies, governments, and organizations issue new securities. Money flows directly to the issuer. Investors acquire newly created securities. There are two modalities: direct issuance (pre-agreement between issuer and investors) or indirect issuance (financial intermediaries participate).

Secondary Market (or trading market): It is where existing security holders trade among themselves. Here, the “used” securities are traded, in contrast to the “new” ones in the primary market. This is the scenario where the market value of a stock that we see on the screen is formed.

The vast majority of our operations as investors occur in the secondary market.

Market Value and Stock Market Capitalization: Two Sides of the Same Coin

These concepts are inseparably linked. Market capitalization represents the total value that the market assigns to a company as a whole.

It is calculated as: Market Capitalization = Market Value of the Stock × Total Number of Shares

Reversing the formula gives us the individual market value:

Market value of a stock = Market Capitalization ÷ Total Number of Shares

Fortunately, these calculations appear automatically on the broker’s screen. The important thing is to understand that market capitalization does not necessarily match the value the company has on its books.

The Bid-Ask Spread: The Invisible Commission of Trading

When we operate with securities, we see two prices simultaneously:

• Bid (sale): The price at which we can sell our asset
• Ask (buy): The price at which we can buy it

The difference between them is called the spread and represents the implicit commission that the intermediary retains from each transaction. In very liquid assets, the spread is minimal. In illiquid assets, it can be significant.

Do All Assets Have Market Value?

No. An asset only has market value if there is sufficient liquidity.

Shares of large companies like BBVA have immediate counterparties. Shares of small companies hardly find buyers or sellers. And if you acquire private equity or non-listed debt, you will probably discover with horror that it is practically impossible to get rid of the position when you need to.

Liquidity determines whether an asset has an operational market value or if it simply has a theoretical value that no one is willing to pay.

The Three Valuation Metrics: Nominal, Book, and Market

There are three different ways to value a stock, and many investors confuse them:

Nominal value: The price at which the stock was originally issued. It is calculated by dividing the share capital by the total number of shares. It serves as a historical reference point but little more. Over time, it diverges greatly from market value.

Book net value: Reflects the company’s value according to its books, calculated as (Assets - Liabilities) ÷ Number of shares. Value investors consider it the most serious metric, arguing that eventually the market will recognize it. Often, it does not.

Market value: What the market is paying right now. It results from the dynamic equilibrium between buyers and sellers. It is the most visible but potentially the most misleading.

The Fundamental Problem: Market Value Can Be Completely Wrong

Here, intellectual honesty requires admitting an uncomfortable truth: the market value of a stock is fundamentally inefficient. It does not necessarily reflect what the company is truly worth.

Is the book value better? Not really. Both metrics have limitations. But market value has a particular problem: it is subject to speculative bubbles where prices rise disconnected from any fundamentals.

The Terra case: From star to disaster

Terra started trading around 11.81 euros. In less than twelve months, it reached 157.60 euros. Why? Simply because the internet decided it was the next “successful business.” The company was even advertised on television during prime time as a stock market triumph.

Three years later, it was absorbed by its parent company. In 2017, the last remnants of the company disappeared. The market value had been completely fictitious.

The Gowex case: When market value was pure lies

Gowex was a Spanish company that boasted spectacular results. It claimed to be one of the largest global providers of Wi-Fi technology. The problem: few truly understood how Wi-Fi worked.

When a U.S. research firm conducted an exhaustive study, the house of cards collapsed. Its CEO had lied to employees about the company’s viability. Investors discovered that that stock, which was growing endlessly on the stock exchange, was nothing more than a colossal scam.

Both cases illustrate that market value can become completely disconnected from reality.

Conclusion: Use Market Value Wisely

The market value of a stock is the most important metric on the stock exchange because it determines the trading price. But it should be approached with healthy skepticism.

After a decade of low interest rates and extremely lax monetary policies, the current environment again favors fundamental analysis. Money seeks companies with solid cash flows, controlled expenses, and proven viability, rather than chasing speculative growth.

To make responsible investment decisions, market value should be complemented with analysis of the book net value, study of financial statements, and genuine understanding of the underlying business. The price you see on the screen is important, but it should never be the only metric you consult before investing.