Book Value vs Market Value: Difference and Comparison

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

  1. Book value represents a company’s net worth on its balance sheet, while market value indicates the price at which its stock trades.
  2. Book value is based on historical cost and accounting principles, whereas market value is influenced by investors’ perceptions, market conditions, and prospects.
  3. 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 marketplace and is also called open market valuation.

Book Value vs Market Value

The book value, in simplest terms, is the original price of a product. However, any discounts or extra expenses for the product or interest associated with it aren’t a concern.

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 ValueMarket Value
DefinitionIt is the actual price of a commodityIt is the price at which the commodity is sold at a marketplace
PriceThis is mostly lower than the market valueIt is mostly higher than than the book value
Competition involvedThere is no competition involved in itIt involves competition among various companies. 
InclusionIt doesn’t include depreciation or interest. It includes all the costs along with the profit. 
Formula Total assets – liabilitiesMarket 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 and interest associated with it aren’t a concern.

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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 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 costs associated with the production. 

It is pretty different from the mv as here there is no competition. This value can 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). 

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The second type of approach is the market approach which 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

  1. The book value is exclusive of any reduction or interest. At the same time, the market value includes everything along with the extra profit. 
  2. The formula of book value is total assets minus liabilities. Whereas the formula for market value is the price of something multiplied by its number, be it commodity or shares.
References
  1. https://www.jstor.org/stable/3666236
  2. https://www.emerald.com/insight/content/doi/10.1108/03074350910923491/full/html

Last Updated : 21 August, 2023

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23 thoughts on “Book Value vs Market Value: Difference and Comparison”

  1. This article has certainly expanded my knowledge of these financial concepts. Clearly presented and easy to understand.

    Reply
  2. I wish there was more of a critical examination of the implications of book value and market value for various sectors of the economy.

    Reply

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