Book Value vs. Market Value

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Shares of stock are pieces of ownership in a publicly traded company. Investors use book value and market value to evaluate stocks for investment. An understanding of the different values is important in stock selection.

Current Price

  • Market value is the current share price of the stock as reported by the stock exchanges. The market value is the price at which an equal number of buyers and sellers are willing to sell and purchase the stock.

Accounting Value

  • Book value per share is an accounting value that is the shareholder equity in a company. If all of the company assets are sold and all debts and bills paid off, the amount remaining for each share would be the book value.

Potential

  • Value investors look for stocks whose market value is near or below the book value. Growth stocks usually have market values many times the book value.

Significance

  • Stocks in some industries, such as banking and railroads, will have high book value in relation to the market value. These industries require a lot of assets to generate revenue and profits. Other industries do not need assets so will have relatively low book value compared to market value.

Warning

  • A low market value to book value ratio does not always indicate a good value stock. If the book value is declining or the company is near bankruptcy, the low market value may be indicating a company in trouble.

Other Definitions

  • Market value per share times the shares outstanding is called market capitalization. Book value per share times the number of shares is called shareholder equity.

References

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