Before investing in shares, everyone is concerned about the valuation of shares, whether they are fairly valued or not, while a few investors focus only on the current market price of the share. Both book value and market value plays an important role in making informed decisions.
In today’s blog post, we will give you an overview of the book value and market value of shares, along with their key differences.
What is the Book Value of Shares?
Features of the Book Value of Shares
The key features of the book value of the shares are as follows:
- Financial Data: The book value of shares is calculated based on the company’s financial information, including assets and liabilities.
- Net Worth: It reflects the net worth of the company, which is derived after adjusting for all its liabilities.
- Higher the Better: The higher the book value of the company, the better the investment opportunity.
- Fundamental Investing: The book value of the company is generally used by the investor for picking right stocks.
Importance of the Book Value of Shares
The key importance of the book value of shares is as follows:
- Actual Valuation: The book value helps in the identification of the actual value of shares based on the financial statements, which helps an investor in identifying whether the shares are fairly valued or not.
- Fundamental Analysis: It helps in analysing a company based on the fundamentals to find out its actual value.
- Reduces Risk: Investing in stocks which are trading in a range around its book value is considered a safe bet by investors.
- Strength: If the book value of the companies is increasing over a period, it reflects the effective management and strong financials and growth in the company.
Formula to Calculate the Book Value of Shares
The formula to calculate the book value of a share is as follows:
Book Value of Share = (Total Assets – Total Liabilities – Preference Share Capital) / Total Number of Equity Shares Outstanding
Example of Book Value
Suppose a company named ABC Limited has a total asset of INR 12 crore, liabilities of 7 crore, and preference share capital of 1 crore and 8 lakh of equity shares.
Let’s calculate the book value of ABC Limited.
By applying the formula
Book Value per share = Total Assets – Total Liabilities – Preference Share Capital / Total Outstanding Equity Share
= (12cr. – 7cr. – 1cr.) / 8lakhs
= 4cr. / 8lakhs
= 50 INR
Hence, the book value per share is 50 INR.
Read Also: Intrinsic Value vs Book Value
What is the Market Value of Shares?
The market value of a share refers to the publicly traded current price of a share at which the shares of a company are traded on the stock exchange. The market value of shares is derived from the demand and supply of shares, which is influenced by the sentiments of investors, the performance of the company, future growth expectations, etc.
Features of Market Value of Shares
The key features of the market value of shares are as follows:
- Fluctuations: The market value of shares changes on a real real-time basis; it changes in a fraction of a second depending upon the liquidity of the share.
- Demand and Supply: The price discovery is primarily impacted by the demand and supply of the shares by the investor.
- Market Capitalisation: The market capitalisation of the company is calculated based on the market value of shares.
- Differ from Book Value: The market value of shares can differ from the book value of shares. It can either be higher or lower than the book value, depending on the various factors.
Importance of Market Value of Shares
The key importance of the market value of shares is as follows:
- Decision Making: The Market value of the company can help an investor in deciding whether to buy, sell or hold the shares.
- Comparison: The market value can also be used by the investor to compare the market value of different shares to make an informed decision.
- Market Sentiment: The increasing value of shares represents the positive market sentiment, and vice versa. As market sentiment is a crucial factor for making investment decisions.
- Corporate Actions: The market value of shares is significantly impacted by the various corporate actions, such as buybacks, bonus shares, stock splits, etc.
Difference Between Book Value and Market Value of Shares
The key difference between book value and market value of shares is as follows:
| Particular | Book Value | Market Value |
|---|---|---|
| Calculation | It is calculated based on the assets, liabilities of the company. | The market value of the company is calculated based on the demand and supply of the shares. |
| Changes | Book value is historical in nature. | Market value is dynamic and changes on a real real-time basis. |
| Reflection | It is reflected in the financial statement of the company. | The market value of a share is reflected on the stock exchange on which it trades. |
| Usage | The book value of a share is generally used by the long-term investor. | The Market Value of a share is often used by traders. |
| Sentimental Impact | The book value of the share is not impacted by the sentiment of investors. | The market value of a share is highly impacted by the investors’ sentiments. |
Read Also: Stock Market vs Real Estate: Which Is Better?
Conclusion
On a concluding note, book value and market value serve different purposes but are equally important for investors to make investment decisions. The book value of the share reflects the financial strength of the company and is calculated based on the assets and liabilities of the company. On the other hand, market value of the company reflects the current share price of the company, which an investor is willing to pay. However, investing based only on the book value or market value of a share is not a sensible decision. One should consult their investment advisor before making an informed decision.
Frequently Asked Questions (FAQs)
Which is more important, market value or book value?
Both market value and book value are equally important; book value helps in assessing the intrinsic value of a share, and market value helps in understanding the sentiment of the investor.
Why book value change over time?
Book value changes over time based on the company’s profitability, assets, liabilities, etc.
Can the market value of a share be lower than the market value?
Yes, there are various stocks which trade below their actual book value. This happens because investors think that the actual value of the asset is less than its recorded book value.
Is a stock undervalued if its market value is lower than its book value?
Not always. A market value lower than book value may indicate undervaluation, but it can also reflect poor business performance, weak future prospects, or sector-specific challenges. Investors should combine this with fundamental analysis.
Why do long-term investors focus more on book value?
Long-term investors use book value to assess a company’s intrinsic strength, financial stability, and asset backing, making it useful for fundamental and value investing strategies.
