Book Value vs. Market Value of a Share

Share investors tend to attach lots of value to the book value of a share and its comparison with its market value. You might have heard about the investment strategies of successful investors like Warren Buffet who compare the market value of a share with its book value before making their investment decision. Do you know what these two terms stand for?

Let us understand book value, market value, and their relation with each other.

What is the Book Value of a Share?

The book value of a share, as the name suggests, is the value of a share according to the books of account of the company. It is the value of a share as reflected by the financial statements of the company.

Technically, book value is the fairest value of a share at any given point. It is neither fixed like face value that remains constant even in changing situations nor does it fluctuates like the market value that is affected even due to unrelated factors.

Talking from the viewpoint of investors, book value is the amount a shareholder will receive if the company is liquidated and its liabilities are paid off.

What is the Market Value of a Share?

The market value of a share is the value at which a share is currently trading in the stock market. It shows the amount the general public is willing to pay for that share. This price keeps fluctuating as per the market sentiment. Buyers try to buy at a lower price while sellers try to sell shares at a higher price and this demand and supply bring the price to the level that is termed market value.

Relation between Book Value and Market Value of a Share

Investors need to understand the relation between book value and the market value of a share to make important investing decisions. Many successful investors base their decision of investment primarily on the comparison between these two terms.

There are three possible scenarios that help investors in making their investment decisions –

• Book Value lower than Market Value – When market value is higher than book value it shows people’s positive perception of the company. Most companies trade at a higher value than the book value. In this scenario, the market believes in the future potential of the company. However, the gap between these prices is a significant indicator of the people’s level of confidence in the company. When the gap between the two values is significantly greater, it may indicate a situation where a share is considered overvalued. Some investors may be reluctant to buy shares at this price.
• Book Value equals the Market Value – This scenario may indicate the unsurety of the market about the given share. The market in a way shows a neutral stance. If all other parameters are favorable, this can be the best price for an investor to make an investment.
• Book Value higher than Market Value – Normally shares do not trade below the book value. This scenario depicts lesser confidence in the market. It shows that investors in the market do not have trust in the growth possibility of the business or may have temporarily lost confidence. However, it does not mean that the company is not performing well in its operation; it just conveys the market sentiment which can be affected by myriads of reasons like political and economic news.

Differences between Book Value and Market Value

Book Value vs. Market Value of a Share

Basis of Differences	Book Value	Market Value
Definition	The value of a share according to the books of account of the company.	The value of a share according to the current price in the stock market.
Valuation	The valuation depends on the performance of the company as reflected by books of accounts.	The valuation depends on market sentiment rather than the actual performance of the company.
Significance	Book value represents the actual worth of a share of a company.	Market value is the current highest estimated value of a particular share.
Fluctuation Frequency	Book value fluctuates at periodic intervals. This interval depends on the accounting practice of the company.	Market value fluctuates frequently during trading hours.