In financial terms, a principal market refers to the market with the highest volume and level of trading activity for a particular asset. This is where the asset could command the best price.
For example, a company’s principal market for its stock is usually the stock exchange where it is listed and where most of the trading for that stock takes place. If a company’s shares are listed on multiple exchanges, the exchange with the highest volume of trades for the company’s shares would be considered its principal market.
The concept of a principal market is often used in fair value measurements. According to accounting standards, when determining the fair value of an asset or liability, an entity should take into account the price in the principal market for that asset or liability (or in the absence of a principal market, the most advantageous market).
It’s important to note that the principal market needs to be accessible by the entity. That is, the entity should be able to transact in that market at the measurement date.
As with many financial and accounting terms, the specific application of the term “principal market” can depend on the context and the specific rules and regulations of the relevant accounting standard-setter.
Example of a Principal Market
Let’s consider an example with a publicly traded company.
Say we have a multinational company called ‘ABC Corporation’ whose shares are listed on the New York Stock Exchange (NYSE), London Stock Exchange (LSE), and the Tokyo Stock Exchange (TSE).
Let’s say the daily trading volumes for ABC Corporation’s stock on the three exchanges are as follows:
- NYSE: 1,000,000 shares
- LSE: 500,000 shares
- TSE: 300,000 shares
Based on these trading volumes, the NYSE would be considered the principal market for ABC Corporation’s shares because it has the highest volume and level of trading activity.
Therefore, if ABC Corporation needed to determine the fair value of its own shares for financial reporting or other purposes, it would look at the price on the NYSE (the principal market) to establish that value, assuming it has access to trade on the NYSE at the measurement date.
This ensures that the company uses the most accurate and representative market price in its valuation, providing a more reliable measure of fair value.