Difference between Face value, Market Value, and Book Value

17 Apr 2021by Pradeep U

Difference between Face value, Market Value, and Book Value

As a stock market investor, you must have come across the face value, market value, and book value regularly. But do you know the meaning of these terms and the difference between them?

In this article let’s take a detailed look at:

What is Face Value?

What is Market Value?

What is Book Value?

What is the difference between Face value, Market Value, and Book Value?

What is Face Value?

Face value is the value of a company when it issues shares for the first time. The face value of its stocks is decided by the company and is crucial from the company’s perspective to calculate the accounting value of its shares. 

Let us understand face value with the below example of Kalyan Jewellers IPO which hit the market last month:

Source: Yahoo Finance

As you can see in the above image the at the time of the Kalyan Jewellers IPO the company has fixed the face value of its shares as Rs. 10.

The face value of a share issued by a company remains fixed till there is a split or a reverse split in its shares.

For example, Eicher Motors announced a 10:1 split in its shares on 21st Aug 2020 as a result of the face value of its shares changed from Rs. 10 to Rs. 1.

So, in such a scenario, an investor holding 100 shares of Eicher Motors of face value Rs. 10 would be holding 1000 shares of face value Rs. 1 post the split.

How to calculate face value?

The formula for calculating face value is

Face value = Equity share capital

                        Total no of shares

This information is easily available in the public domain as well as investing-related websites Moneycontrol, Yahoo Finance, etc.

What is Market Value?

Market value refers to the current share price of a stock on the stock exchanges. The market value of stock keeps fluctuating depending on the buyer and seller demand, economic, political, and global factors.

The total market value of a company or market capitalization can be calculated by multiplying the current share price with the total number of outstanding shares. For example, if a company's current share price is Rs. 100 and the total number of outstanding shares is 5,00,000 the company's market capitalization would be Rs. 500,00,000.

What is Book Value?

The book value of a company refers to the total value of a company's assets that shareholders of that company are likely to receive in the event of the company's liquidation. The book value of a company is the net difference between that company's total assets and total liabilities.

Book value per share (BVPS) is an important metric used in fundamental analysis to determine the per-share book value of a company. In the event of a company’s liquidation, the book value per common share reveals the cash value remaining for common shareholders after liquidating assets and paying off all debtors.

The formula for calculating book value per share:

Book value per share = Total equity – preferred equity

                                      Total outstanding shares

In case the book value per share of a company is higher than its market value per share, then the stock may be undervalued.

What is the difference between Face value, Market Value, and Book Value?

The face value of a stock is not affected by the market situation. Irrespective of a bull market or a bear market it will continue to remain the same unless there is a split or a reverse split. On the other hand, the market value of stock changes with market conditions. Like the face value of a stock, the book value of the stock does not change with market conditions.

While the face value of a stock and its book value can be calculated by looking at a company's balance sheet, the market value of a stock (current stock price) is easily available everywhere.

Key takeaways

Face value, market value, and book value are some key terms that every stock market should be aware of.

Face value of a stock is a metric used only for accounting purposes as it is the original value of a share decided by the company while issuing the shares. The market value of a share requires no calculation and it is easily available everywhere. Out of the three terms, the book value of a stock is the most important metric for investors. By comparing it with the market value an investor can determine whether the stock is undervalued.

Success in equity investing requires a lot of knowledge and skill to read and understand financial statements of companies as well as lot of patience. If you do not have the time or the expertise for all this it his highly recommended to seek expert advice of a professional stock advsiory. 

Click here for expert help.

 

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