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Difference between Book Value and Market Value of a Share
People often get confused with the terms "book value" and "market value" of shares. While there are undoubtedly some good reasons to confuse one for the other, the book value and market value of shares are two distinct terms with different meanings. However, one can be related to the other in some cases when certain forms of values are same in both the cases.
How to Calculate the Book Value?
The book value of a share is given by its net worth divided by the total number of outstanding shares in the market.
$$\mathrm{\mathrm{Book\: Value}\:=\:\frac{\mathrm{Net\: Worth\:of\:a\:Company}}{\mathrm{Total\:Number\:of\:Outstanding\:Shares}}}$$
The net worth of a company is made up of share capital, share premium, and reserves & savings.
The share capital is the total amount of capital represented by the shares of a company.
The share capital is further divided into authorized, issued, and subscribed share capital.
Authorized capital is the maximum share capital that is authorized for the company for the shareholders.
Issued share capital is the amount of share capital that is issued for the shareholders by a company apart from the savings retained that is called reserves & surplus. These three factors must be used to get the net worth of a company.
After realizing the net worth, it must be divided by the total number of outstanding shares in the market to get the book value of a share.
What is the Market Value of a Share?
The market value of a share has nothing to do with its book value once it is issued in the market for trade. The trading of shares takes place in the market depending on the performance and other related factors. Good performance, better management, and a host of other factors may contribute to an increase in the market price of a share.
The market price of a share is the market value of an ordinary share.
Market price is the trading price of a share in the market and it may differ from one market to the other. However, the book value of a share is constant and it won’t get altered even if markets change.
Investors and traders in the market often rely on the market value of a share while trading or investing in a company’s shares. Therefore, market value is more important for a company than its book value.
However, the book value may often influence the value of the market price of a company’s shares. That is why, even though the book value and market price are two different terms, both have their individual importance.
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