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.
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.
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.
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.
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.
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.
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.
- How should I use book value when evaluating a stock?
- Book Value
- Market Value
- Microsoft. "Earnings Release FY20 Q4." Accessed Nov. 1, 2020.
- Walmart. "Walmart 2020 Annual Report," Page 52. Accessed Nov. 1, 2020.
- Nasdaq. "MSFT Historical Data." Accessed Nov. 1, 2020.
- Walmart. "Walmart 2020 Annual Report," Page 50. Accessed Nov. 2, 2020.
- Nasdaq. "WMT Historical Data. Accessed Nov. 2, 2020.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.