One of the biggest challenges in the world of personal and business finance is dealing with alternative investment valuation efforts. Whether you're trying to handle regulatory, tax, or financing issues, it's important to provide a fair valuation for the items involved. The process is difficult though, so take a look at why that's the case.
Different Types of Assets
Generally, an alternative investment involves a tangible or intangible item that isn't widely traded on a regulated market. Some are one-of-a-kind items, such as paintings or sculptures. Others are narrowly traded items, such as stamps, precious metals kept in hand, or vintage alcoholic drinks like wine. Some derivatives contracts and cryptocurrencies also fit in this category. The unifying feature is that it's simply hard to state for sure what these assets are worth.
If a painting hasn't been auctioned in decades, for example, it's hard to state for financial reporting valuation purposes what its exact price would be. This phenomenon is referred to in finance as low liquidity. It means that there isn't a robust market trading in this type of item every day.
For example, millions of shares of stocks and futures contracts for commodities are traded every day. If you want to unload a contract for oil delivery, you can bet on any regular trading day that someone is willing to buy it right away if you're willing to sell at market price.
At the opposite end of the spectrum are investments with extremely high volatility levels. Cryptocurrencies, for example, have high liquidity levels, but they can swing wildly in value daily or even by the minute. What might have been worth $1,000 yesterday could be worth $5,000 tomorrow and $750 a week later.
If you're using such investments as collateral for a purchase, it can be difficult to arrive at a valuation that the other side will be happy with. Fortunately, laws governing realized sales at least minimize the tax headaches in this class.
Due to trafficking in many of these assets in illegal trades, it's also important to be able to document both their authenticity and chain of ownership. This induces trust and compliance issues. Notably, valuations can be adversely affected to the tune of thousands or millions of dollars if detailed documentation isn't available.
Ultimately, a financial reporting valuation firm will try to model the price of an alternative investment. This may include studying markets and looking at things like inflation or the condition of the asset.
For more information, contact an alternative investment valuation service.Share