In the field of business and share markets, two things come into the limelight. The first one is the book value, and the second is the market value.
Key Takeaways
- Book value represents a company’s net worth on its balance sheet, while market value indicates the price at which its stock trades.
- Book value is based on historical cost and accounting principles, whereas market value is influenced by investors’ perceptions, market conditions, and prospects.
- Market value can be higher or lower than book value, depending on company performance, industry trends, and investor sentiment.
Book Value vs Market Value
Book value is the actual price of a commodity according to the balance sheet account balance. It changes periodically and is based on the original cost less depreciation. Market value is the price that the asset would fetch in the market place, and is also called open market valuation.
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The book value, in simplest terms, is the original price of a product. However, any discounts or extra expenses for the product, interest associated with it aren’t concerned.
The market value of something is the portion of the cash that can be generated by selling a specific commodity. A characteristic of competition is present within it. Here a certain amount of revenue can also be assumed.
Comparison Table
| Parameters of Comparison | Book Value | Market Value |
|---|---|---|
| Definition | It is the actual price of a commodity | It is the price at which the commodity is sold at a marketplace |
| Price | This is mostly lower than the market value | It is mostly higher than than the book value |
| Competition involved | There is no competition involved in it | It involves competition among various companies. |
| Inclusion | It doesn’t include depreciation or interest. | It includes all the costs along with the profit. |
| Formula | Total assets – liabilities | Market price × number of shares |
What is Book Value?
The book value of something in simplest terms is the original price of a product. However, any discounts or extra fees for the product, interest associated with it aren’t concerned.
A sheet that is used to calculate the balance contains all the expenses that were used while making a particular product. This however is quite exclusive in a way that it doesn’t contain any interests that were incurred or any discounts.
The book value of a product is usually higher in amount than the value in which a product is sold at a market. Two conditions might arise; the first one is when the book value is lower or higher than the value at the market.
The formula to calculate this is adding the actual expenses minus the fluctuations in values or extra cost associated with the production.
It is pretty different from the mv as here there is no competition. This value can usually be associated with the more considerable property.
What is Market Value?
The market value of something can be said to be the portion of the cash that can be generated by selling a specific commodity. A characteristic of competition is present within it.
The market value is greater than the book value. A quantity that is called the p divided by b is used to compare the two terms. The phrase capitalization in the market also recognizes it.
In this, there is an amount of profit that is associated with it. Two situations might arise; the first one is when the market value is higher and lower than the book value.
There are undoubtedly different methods over which this value can be calculated. These include an income approach that has within it the dcf method along with the cem (capitalized earning).
The second type of approach is the market approach that includes within it the PCC and the precedent transactions. This is a fundamental method by which the value of an asset can be calculated.
Main Differences Between Book Value and Market Value
- The book value is exclusive of any reduction or interest. At the same time, the market value includes everything along with the extra profit.
- The formula of book value is total assets minus liabilities. Whereas formula for market value is the price of something multiplied by its number, be it commodity or shares.
- https://www.jstor.org/stable/3666236
- https://www.emerald.com/insight/content/doi/10.1108/03074350910923491/full/html
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
