the difference between price and value

hu guys, im still finding it hard to differentiate between price and value…please help

Price is what the someone pays for something.

Value is what they should pay for it.

“Price is what you pay. Value is what you get.”

So says the Oracle of Omaha.

“Nowadays people know the price of everything and the value of nothing.” - Oscar Wilde

thank you guys, it makes much sense now smiley

1 Question: To arrive at the “price” to be paid to acquire a startup or a private company, the “value” of the business is first determined to arrive at the purchase price. So how can we differentiate price and value in venture capital funding or a strategic acquisition scenario? Is Price=Value in this case?

For example, the whatsapp acquisition of 19 billion values the company at 19 billion. Here the price and value are used to mean the same. So am i right in thinking that the intrinsic value and market value don’t differ in case of the companies which are not listed on a stock exchange.

I found this it might help us understand the question better:

For most customers price by itself is not the key factor when a purchase is being considered. This is because most customers compare the entire marketing offering and do not simply make their purchase decision based solely on a product’s price. In essence when a purchase situation arises price is one of several variables customers evaluate when they mentally assess a product’s overall value.

As we discussed back in the What is Marketing? tutorial, value refers to the perception of benefits received for what someone must give up. Since price often reflects an important part of what someone gives up, a customer’s perceived value of a product will be affected by a marketer’s pricing decision. Any easy way to see this is to view value as a calculation:

Value = perceived benefits received perceived price paid

For the buyer value of a product will change as perceived price paid and/or perceived benefits received change. But the price paid in a transaction is not only financial it can also involve other things that a buyer may be giving up. For example, in addition to paying money a customer may have to spend time learning to use a product, pay to have an old product removed, close down current operations while a product is installed or incur other expenses. However, for the purpose of this tutorial we will limit our discussion to how the marketer sets the financial price of a transaction.

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I don’t really understand the concepts of price vs value from the derivatives section either at least not from a mathematical perspective.

Makes sense form a definitions perspective - price is what you pay, value is what you get.

Price - PV of future cashflows

Value - Expected future price + interim payments (dividends, coupons etc) - discounted at a rate appropriate for risk assumed


Cashflows from owning a share would be dividends as well as the price of the share e.g.:

$5/(1+r)^1 + $6/(1+r)^2 + $4/(1+r)^3 + ($5 + $25)/(1+r)^4

so dividends are $5, $6, $4 and $5 + the $25 dollars received for the money you get from selling share to close out the position.


Same dividends for a share as example above, same price of share upon its sale at T=4.

$5/(1+r)^1 + $6/(1+r)^2 + $4/(1+r)^3 + ($5 + $25)/(1+r)^4

So they are the same???

Price is decided by Mr. Market. Value is decided by Ms. Intuition.

The formulas above are simplifications of “intuition”, so they’re trying to discover Value rather than Price.

Yep have heard that one before. Doesn’t make it any clearer :). After all, Mr Market isn’t always right nor is Ms Intuition. Otherwise Buffets wouldn’t exist.

The price of a financial asset is often determined using a present value of future cash flows approach. The value of the financial asset is the expected future price plus any interim payments such as dividends or coupon interest discounted at a rate appropriate for the risk assumed.

(Institute 62)

Institute, CFA. 2016 CFA Level I Volume 6 Derivatives and Alternative Investments. CFA Institute, 07/2015. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

PV of future cashflows is an expectation because you don’t know what the value of the benefits is going to be just as in the value definition. To me that definition simply means - when negotiating, provide calculations that are plain wrong and hope they don’t notice. Since people in the industry all read the same material, the chances of that happening are slim.

Think about the lottery ticket. Price is what you pay for it, value is zero or $1m+++ after the draw.

Yep that example makes sense, however the way the book describes it isn’t very clear at least to me. Both price and value are defined as discounted future cashflows. What they are trying to imply by this is beyond me.