Difference between market value and book value

All of these terms are used for the financial market and signify a particular meaning to the financial instruments. These terms have a different value for every financial instrument and should be taken into consideration. So let us know about every term in detail:

Face value

This is the value that represents the nominal value of the company. For stocks (original cost) it is generally at 10 and for bonds (par value) 100. This value usually remains the same for stocks and is of very much importance when a company decides to do most of the corporate actions (dividends, bonuses, splits, etc).

It changes if the company decides to split (the value goes lower) and when the company chooses a share consolidation (the value goes higher but usually not above 10). Both of these actions happen in the form of ratios, like 1:2 or 1:5, etc, with the left value denoting the initial amount and right the final value. The face value of a company does not change due to any other reason (results, news, change in government policies, etc.)

If the face value of a company is multiplied by the shares outstanding, then we get the equity capital. For bonds, the face value is the amount of money the issuer provides to the investor when it becomes mature. The face value of bonds changes along with the interest/inflation rates. It may go higher (premium) or lower (discount). In the case of zero-coupon bonds the face value is always lower while purchasing.

FACE VALUE   =   EQUITY SHARE CAPITAL/ NO. OF SHARES OUTSTANDING                                       

Book value

The book value of a company is the net value which is in the books. It means it is the value a company will provide to the investors if the company goes bankrupt. This value is determined by selling off all the assets and paying off the liabilities and dividing the left amount by the number of shares. Although not very high in comparison to the market value, if the market value of a stock goes below the book value then it is a good buy signal.

Market value (coming up next) to book value is an excellent indicator in determining if the company is overvalued or undervalued. This value helps in making a few financial ratios also like price to book value, sales to book value, etc. The value changes only due to the results shared by the company, it doesn’t get much affected by corporate actions, news, etc.

The book value for bonds refers to the current price for the remaining coupons plus the redemption value at the coupon rate. If we need to know the price in between the coupon dates then we will not consider the value of the next coupon.

Market value

This is the value at which the stocks trade in the stock exchanges. The definition is also equally valid for bonds at the bond market. This is commonly known as Current Market Price (CMP). The market value of the stock keeps on changing (almost every second) until the stock exchanges settle down. This change of prices is due to multiple reasons such as results, news, changes in government policies, corporate actions, etc. The market value faces a drastic turn when there’s a stock split (gets halved) or shares consolidation (gets doubled).

The market value tells the amount that the buyer pays and the seller sells for every share that is purchased or sold. In cases of high volatility, speculators earn good money. This value helps us in determining the capitalization of a company by simply multiplying it with the number of shares outstanding. Very high market value does scare a lot of investors/speculators but shouldn’t be bothered if we know how well is the company performing. Some companies due to either about to wind up or due to some other reasons have a very low market value and they are often called pennies (penny stocks). This value is not only used in financial instruments but in every possible thing like groceries, cattle, property, etc.

Intrinsic value

It is the actual value that the investor decides to pay/get for the investments. This is also the value which is commonly known as the discounted value of future benefits.“It is the discounted value of the cash that can be taken out of a business during its remaining life.” This is the famous quote by the great investor Warren Buffet. Although it is tough to calculate if someone knows how to, then that person will soon become the king of investments.

If the intrinsic value is perceived to be lower than the market value then the investment is said to be overvalued and vice versa. This value is determined by qualitative and quantitative analysis. Therefore, this value is regarded as a part of the valuation and not the fundamental value or technical value. The intrinsic value is mostly calculated for stocks and other investable instruments (that provide capital appreciation).

So, while reading any financial reports or analyzing the value of a company, an investor should be careful about the type of value he/she is using as it can significantly affect the decisions to be taken.