Book Value vs Market Value
For the purpose of investment, it is important to know the difference between book value and market value. There is no doubt in the fact that it is one of critical aspects of business. The process is simple and yet complicated. While investing in a company, you have to know whether you have been investing a sensible amount of price for the share, stock or an entire company.
Through the term book value, you may come across at a financial statement. Calculation of book value is generally done with the assistance from the balance sheet. It can be considered as difference between company’s asset and total amount of liability. It can be equated with the shareholder’s equity also. In case, company total asset is about $ 100 million and the amount of liability is about $ 80 million then book value can be about $ 20 million. In a simple language, it can be said that after selling company’s asset and paying the liabilities, you may get the book value as the net worth.
Market value of the company is generally decided according to stock cost. Calculation of this value is made through multiplying the market price at the present moment with the amount of the shares outstanding. For example, if a person has one million shares of a company and the market value for each share is $ 50 then it is possible to get $ 50 million from these stocks quite easily. It is also the market value.
What is Market Value?
Market value is the type of value that has been utilized by the trade analysts, investors and newspapers to show the worth of the company in the financial market.
Do you like to know about both the values? Then you must go through the procedure of book value Vs market value. Book value is certainly found through the accounting books. It is generally decided following to an audit and calculation of assets and liabilities of the company in proper manner. However, accuracy of the book value can be judged through the market value. Due to this reason, market value of a company is given much more importance than the book value.
Fluctuation between the book value and market value is quite natural. It is also proved through the above fictitious example on the subject. Difference between the both values depends on various factors. Type of the company plays an important role on the occasion without any doubt. It is necessary to look at some specific attributes at the same time.
Two general ideas can be found about book value Vs market value. They are following.
- Book value is always better than market value. Company’s value is always lesser in financial market if you compare it with the net worth or book value. Loss of faith in a company is seen quite quickly in the financial market. Therefore, book value is quite higher in most occasions as it takes the assets and liabilities in to the account exclusively.
- Due to earning power, investors give more importance to market value always.