What is Book Value, Market Value and Face Value? Comparison Between Book and Market Value.

When you invest in the stock market you get to hear 3 values of share. One is the face value, second is book value and the third is market value. So many people get confused, what is the meaning of which value and what is exactly the concept of it? So in this post, we will understand the concept of how face value, book value, and market value differ. How to calculate these. So let's understand Book Value, Market Value, and Face Value with an example.

Face Value, Book Value and Market Value

What is Face Value?

Suppose you want to start a company, let's say you want to place a shoe manufacturing unit. So for that first of all, you will register a private limited company. When you register a company, you need to appoint directors and you need to put capital. We call that capital Equity capital, which initially the promoters put. And some shares are issued against the Equity capital. The issued shares have some value that we call face value.

So when you initially issue shares then the original value of the share that is mentioned in the certificate is the face value. Whatever amount you invest we call it Equity capital and the formula for that is (face value) multiple (number of shares). So suppose you invested Rs 1 crore and set face value for 1 share to Rs 10 and you issued 10 lakh shares.

So how much is your Equity capital? Rs 1 crore, that you initially invested.

Now see and understand, Equity capital is minimum legal capital that you need to maintain in a business. This is a type of reserve. So the money should not go below this limit and the sum above the limit is what you can give as a dividend to the investors. There is no problem if the capital dips below this if you are investing in your business so that is not an issue. But the sum above equity limit, only that you can give as dividend to the investors and shareholders. There is no need for face value more than this, when you invest in shares then you don't need to bother much about face value. And let me tell you another fact, the face value does not change with time until the stock splits, suppose instead of 10 lakh you set 20 lakh shares then the face value would be 5 instead of 10. So the face value does not change if the number of shares is the same.

But if the number of shares increases, the face value can change. And as I told you earlier you don't need to bother much when investing, but your concept should be clear. So when you invest in shares then you need to bother more about book and market value.

Also Read, What is Share Market? Basic Concepts of Share Market.

What is book value?

Book value is the value of Shareholder's Equity according to Books of Accounts. Mean according to the balance sheet the value of Shareholder's Equity is the book value. Let me explain this with an example. Suppose in this factory all the assets, plant & machinery, its real estate, and cost of the building suppose the value of the total asset is Rs 20 crore. Plant & machinery, real estate cost. The cost of the building, all the fixed and current assets is Rs 20 crore. Now if we divide this Rs 20 crore then let say your Rs 15 crore in this is for equity. Mean the initial investment by the promoters, or by the investors. And the left amount is Rs 5 crore, let say you have a loan, that we call liabilities. Alright, so this Rs 20 crore split has Rs 15 crore as equity and Rs 5 crore liabilities. So now, what will be the book value? The book value is the shareholder's equity according to accounting, it is the book value.

Now, what is the book value? This book's value is the company. So if we want to calculate book value per share then what will be its formula? You will subtract liabilities from tangible assets. So let's take an example, how much are the tangible assets in this company? It's Rs 20 crore. You subtracted how much? Rs 5 crore is your liabilities so you subtracted that divided by what is our number of outstanding shares? 10 lakh. So here we will divide it by 10 lakh.

So what is the final calculation here? Rs 15 crore divided by 10 lakh so how much is this? So our book value came out to be Rs 150 per share. Now see while calculating book value one thing you need to keep in mind is that you need to take the value of only the tangible assets. Intangible assets we take fixed and current assets you add both of this and in liabilities also basically we include both normal liabilities and current liabilities.

So you will get the book value, this is according to the balance sheet. Now we are calculating the value of shareholder's equity book value is shareholder's equity.

So you can calculate this by another method too. The equity capital, initially you invested Rs 1 crore and let's say you earned Rs 14 crore over some time you collected a cash reserve of Rs 14 crore. So here also what would you do? Total equity capital means here 1 crore is equity capital, reserves are of Rs 14 crore this divides by 10 lakh. So from here also your book value comes out to be Rs 150. Now I will also share a comparison between book value and market value. But quickly before that let's understand market value.

What is the market value of any share?

It is simple when you look at the share price of any company or stock, so the price of the stock is called market value. Market value means any market setting a value of anything according to demand-supply or what will be its future prospects, the value set according to that is called market value. So for example, for this company, if the market value price is Rs 200. Now, the book value is only Rs 150 but the market value is Rs 200. That means people are ready to pay a premium for this, they are putting more value than book value, because they believe its prospects are much better. Now see, let me first clarify what we talked about, this is the market value of the share. So if we calculate the market value of the company here, how much would it be? You will multiply Rs 200 with 10 lakh. So your market value comes out to be Rs 20 crore. So how much was our book value? Book value here was Rs 15 crore.

Let's quickly see the comparison between book value and market value.

Comparison Between Book and Market Value

So book value as I said, according to the balance sheet is the calculated value of a company or share that comes out according to accounting. And book value in a way is the residual value, God forbids that if in case all the assets of a company need to be sold so how much money will we get? It is simply that. If you divide that to all shareholders then you will get the book value. Now, what is market value? Market value is the perception of the market that how is the future of this company?

What are the things that the future may depend upon? It can also depend on intangible assets, we included tangible value in book value but there are intangible assets too. There is a brand value, if it has any technology, it has copyrights, patents, and trademarks. Suppose the strategy of the company is better than the competitors so people will account for that too in the market value. Good leadership and good management, the prospects of the industry are very high, suppose the company is the market leader in their industry. So for this reason people pay a premium in market value. Market value, which we call is a perception of the market.

Also Read, What is Mutual Funds? Mutual Funds for Beginners.

Book value according to accounting is the value of one share, very simple. I think in this post, the face value book value and market value concept is clear. I tried to cover all the major points in this post. Still, if some point was missing or wanted to add so you can comment down below. And don't forget to share this post.

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