Difference Between Book Value and Market Value

Book value and Market value are key techniques investors use to value asset classes (stocks or bonds). Book value is the value of the company according to its balance sheet. Market value is the value of a stock or a bond based on the traded prices in the financial markets. Though the market value can be calculated at any point, an investor gets to know the book value when a company files its earnings every quarter.

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  • The book value of an assetBook Value Of An AssetBook Value of Assets is the asset’s value in the books of records of a company or an institution at any given instance. Assets Book Value Formula = Total Value of an Asset – Depreciation – Other Expenses Directly Related to it
  • read more is strictly based on the company’s balance sheet or “Books.” Book value is calculated by taking the balance sheet’s difference between assets and liabilities. It is also known as Shareholders Equity or’ equity EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders’ Equity Statement on the balance sheet details the change in the value of shareholder’s equity from the beginning to the end of an accounting period.read more or net worthNet WorthThe company’s net worth can be calculated using two methods: the first is to subtract total liabilities from total assets, and the second is to add the company’s share capital (both equity and preference) as well as reserves and surplus.read more and can be derived from the accounting equationThe Accounting EquationAccounting Equation is the primary accounting principle stating that a business’s total assets are equivalent to the sum of its liabilities & owner’s capital. This is also known as the Balance Sheet Equation & it forms the basis of the double-entry accounting system. read more assets= liabilities+ shareholder’s equity.The market value of an asset is assigned by the investors on that date, i.e., based on the current price of that asset traded in the The term “financial market” refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read morefinancial marketsFinancial MarketsThe term “financial market” refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more.It is calculated by multiplying the market price per share of the company with the number of outstanding shares. It can vary, and it can be more or less than book value at any point in time.

Book Value vs. Market Value Infographics

Key Differences

  • Book value is the value of an asset reported on the firm’s balance sheet. Market Value is the current valuation of the firm or assets (the ongoing price of the share) in the market where it can be bought or sold.Book value gives us the actual worth of the assets owned by the company, whereas Market value is the projected value of the firm or the assets worth in the market.Book value is equal to the value of the firm’s equity, while market value indicates the current market value of any firm or asset.An investor can calculate the book value of an asset when the company reports its earnings every quarter, whereas market value changes every moment.Book value shows the asset’s actual cost or acquisition cost, whereas the other indicates the current market trends.Book value is the accounting value of an asset and is less relevant when a company plans to sell that asset in the market; in comparison, the market value reflects the more accurate valuation of an asset during the buying and selling of that asset.The book value of an asset is accounted for in the balance sheet based on historical cost, amortized cost, or fair valueFair ValueThe fair value of an investment is the asset sale price that is agreeable to both the buyer and the seller. There is a caveat; the amount should be agreeable in a free trade scenario; there should be no external pressure or conditions.read more. Market value reflects the fair value or market value of an asset.

Comparative Table

Conclusion

Investors widely use market Value and Book Value of equityBook Value Of EquityThe book value of equity reflects the fund that belongs to the equity shareholders and is available for distribution to the shareholders. It is computed as the net amount remaining after deducting all of the company’s liabilities from its total assets.read more to value an asset class. Comparing both for a company indicates whether the company is undervalued or overvalued. If the market value is less than the book value, it implies the stock is trading at a discount and vice versa.

Book value is the accounting value of an asset and often does not reflect the true market value at which an asset can be bought or sold. Market value provides a more accurate current value as it reflects the demand and supply of an asset. Several multiple valuation techniques like (PE ratioPE RatioThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more, PB ratioPB RatioPrice to Book Value Ratio or P/B Ratio helps to identify stock opportunities in Financial companies, especially banks, and is used with other valuation tools like PE Ratio, PCF, EV/EBITDA. Price to Book Value Ratio = Price Per Share / Book Value Per Share read more, EV to EBITDA RatioEV To EBITDA RatioEV to EBITDA is the ratio between enterprise value and earnings before interest, taxes, depreciation, and amortization that helps the investor in the valuation of the company at a very subtle level by allowing the investor to compare a specific company to the peer company in the industry as a whole, or other comparative industries.read more) use market value, or the book value as one of the variables.

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This article has been a guide to Book Value vs. Market Value of Equity. Here we discuss the top differences between book value and market value of equity with infographics and a comparison table. You may also have a look at the following articles for gaining further knowledge in Accounting –

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