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# Fair Value vs Market Price of Unlisted Shares
Two investors can look at the same unlisted share and disagree completely on what it's worth — yet both can be right, because they're talking about two different numbers. Fair value is what the share is intrinsically worth. Market price is what you actually pay for it today. The gap between them is where most of the opportunity, and most of the risk, lives.
Disclaimer: This article is educational and not investment advice. Valuation involves significant judgement and uncertainty. Figures here are illustrative. Consult a SEBI-registered adviser and do independent research before investing.
What Is Fair Value?
Fair value is an estimate of intrinsic worth — what a share should be worth based on the underlying business, regardless of what buyers are paying today.
Analysts arrive at fair value using methods such as:
- **Discounted cash flow (DCF)** — projecting the company's future cash flows and discounting them back to today's value
- Comparable company multiples — applying valuation ratios (like price-to-earnings or price-to-sales) from similar businesses
- Asset-based valuation — for asset-heavy companies, valuing the net assets on the balance sheet
The critical point: fair value is an opinion, not a fact. Change the growth assumption or the discount rate, and the number moves. Two competent analysts can produce fair values that differ by 30 percent or more. That's normal.
What Is Market Price?
Market price is far simpler to define: it's what a willing buyer pays a willing seller right now. In the unlisted market, that price is set by dealer quotes, driven by live demand and supply.
Market price doesn't ask whether the company is "really" worth that much. It only reflects:
- How many buyers want the share today
- How much stock is available to sell
- The mood of the moment — IPO buzz, sector momentum, a marquee investor entering
This is why a name can trade far from any reasonable estimate of its fundamentals — in either direction.
Why the Two Numbers Diverge
In a perfectly liquid, well-followed market, price tends to hover near fair value because lots of informed participants arbitrage the gaps away. The unlisted market is the opposite: illiquid, thinly followed, and information-scarce. That lets price and fair value drift apart, for a few reasons.
### The Illiquidity Discount
A listed share can be sold in seconds at a known price. An unlisted share might take weeks to sell, only through a dealer, at a spread. That friction has a cost.
A rational buyer therefore demands a lower price than fair value to compensate for not being able to exit easily. This is the illiquidity discount:
- Commonly cited in the range of 10 to 30 percent
- Wider for very thinly traded names
- Narrower for popular pre-IPO names where an exit (the IPO) looks near
So even a fairly valued company might trade *below* its fair value purely because it's hard to sell.
### Scarcity and Hype Premiums
The discount can also flip into a premium. When a pre-IPO name is in the headlines, demand can overwhelm the limited float, pushing the market price above fair value. Buyers are then paying for:
- Expected future growth not yet in the fundamentals
- The scarcity of available stock
- Fear of missing out before the IPO
A premium isn't automatically a mistake — but it means you're betting on the future, not buying current value.
A Simple Illustration
Imagine a company with:
- An analyst fair value of ₹400 per share (from a DCF)
- A market price of ₹520 because it's a hot pre-IPO name
You're paying a 30 percent premium to fair value. That can still be a good investment if the company grows fast enough to justify it. But if the IPO is delayed or growth disappoints, the premium can evaporate — and you'd lose money even if the business does fine.
Now flip it. The same company, out of the headlines, might trade at ₹340 — a 15 percent discount to fair value — simply because few buyers are paying attention. That can be the better entry, if you've done the work to trust the fair value estimate.
How to Use Both Numbers
- Estimate fair value yourself (or use a credible third-party estimate) before looking at the quote — so the price doesn't anchor your judgement
- Compare price to fair value. A large premium means you're paying for the future; a discount may be an opportunity or a warning sign
- Always factor the illiquidity discount. You should expect to pay less than fair value for the privilege of holding something hard to sell
- Be honest about your conviction. Paying a premium only makes sense if you genuinely believe in the growth story
The investors who do well in unlisted shares are rarely the ones who pay any price for a popular name. They're the ones who know roughly what a share is worth — and stay disciplined about the gap between that and what they're being asked to pay.
*Published by the Polemarch editorial team. Not investment advice — valuations are estimates and figures are illustrative.*