When investing in the stock market, investors typically use financial information and ratios about companies to decide which stocks to buy. When determining whether a stock is valued correctly, investors may look at the book value and the market value of the shares. Before choosing a stock with these methods, you must determine which one you put more weight in.
To determine the book value of the company, you need the financial statements that are regularly published. The book value is essentially what the company is worth when you look at how many assets it has in relation to its liabilities. For example, you would add up all of the assets of the company including inventory, equipment and real estate. Then you need to subtract any outstanding liabilities that the company has. The difference between these items is the book value.
The market value of a stock is very simple to determine. Market value is simply the amount of money that people are willing to pay for a stock. To figure out the market value of a stock, you simply need to look at the current price that the stock is trading for in the market. For example, if a stock is selling for $50 per share on the stock exchange, this is the market value for that stock.
Comparing the Two
When trying to decide whether you should buy or sell a stock, using the book value in conjunction with the market value can be beneficial. Ultimately, the true value of a company rests with the financial numbers that it produces. The market value of a stock can be influenced by market sentiment. When investors get scared, they will sometimes drive the price of the stock down below what it should be. If the market value is substantially below the book value, this may represent an opportunity to buy.
Neither the book value or the market value is necessarily more important than the other. However, the book value is something that can be calculated at any moment based on the financial numbers of the company. It is concrete and definite. With market value, the prices change every few seconds throughout the day. If you are going to put more emphasis on one over the other, the book value makes more sense. It is based on hard data instead of public opinion.
- Difference Between: Difference Between Book Value and Market Value
- The Street: Value Stock-Picking With Book Value; Jonas Elmerraji; November 2008
- Fairmark: Fair Market Value of Stock; Kaye A. Thomas
- 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.
Luke Arthur has been writing professionally since 2004 on a number of different subjects. In addition to writing informative articles, he published a book, "Modern Day Parables," in 2008. Arthur holds a Bachelor of Science in business from Missouri State University.