Fair value is a tool used by investors to understand the relationship between the value of futures contracts and the current price of a stock. The term is used in pre-market hours to help forecast the direction of the market. Any differences are used by sophisticated investors to create arbitrage opportunities. CNBC.com displays real time pre-market indicators, such as fair value, and you can also read a text explanation of fair value for indexes, which is what is routinely mentioned on CNBC’s Squawk Box. What is fair value and how is it interpreted by investors? Salman Khan of the Khan Academy gives a detailed explanation in the videos below.
From the first video, you’ll understand:
- The technical definition of fair value
- How fair value is an indicator of what will happen after the market opens
From the second video, you’ll understand:
- How investors interpret fair value
- Whether fair value can be used by average investors