The major difference between Face Value, Market Value and Book Value of a share
It is very important to understand the below concepts before you invest in any stocks. Let’s discuss a brief story to understand the difference between face value, market value and book value of a share
What is the face value?
The face value of shares is the value at which the share is actually listed on the stock market (at IPO- Initial Public Offering time) and it is also called the par value.
If a single share value is 100 rupees and face value is 10 rupees it means the value of your share is 10 rupees but you are paying 990 rupees extra premium for having that share.
It has no relation to the market value of the share price and a listed company often split the share from FV Rs 10 to FV Rs 1 to increase the liquidity of shares, as a result, the number of shares subscribed will be increased.
What is market value?
Market value is the value of the total worth of the company on the listed stock exchange and fluctuates based on the business cycles and dependent on a few other accounting facts.
It represents the company’s total worth and below is the formulae to calculate the market values.
Market value/share = value of the company in the market / total number of shares issued by the company
It changes as per the market demand.
What is the book value?
Book value, in literal terms, means the value of the share in the company’s books. It depicts the amount per share the shareholders can get if the company is liquidated and its assets are sold off to pay the liabilities. Thus, book value is calculated using the following two formulas:
Book value per share = total assets – total liabilities / total number of shares issued by the company
Book value/share = Total equity share capital + reserves and surplus / total number of shares subscribed
Difference between the three concepts
To understand the difference between these three concepts, let’s make a relative analysis of these concepts –
Point of difference
Face value isn’t calculated. it’s determined when the shares are issued by the corporate counting on the capital the corporate wishes to boost.
Market value is calculated by dividing the company’s worth by the number of shares it’s issued.
Book value is calculated by dividing the difference between the company’s assets and liabilities with the number of shares issued.
The face value doesn’t change. It remains fixed. However, if the corporate decides to split the shares then the face value can change.
Changes with the movements within the stock exchange.
Changes within the value are less frequent than market price but more frequent than face value. Usually, changes within the value are often seen per annum when the company’s annual reports are published.
Interpretation of these concepts (Face value, Market value, Book value) for an investor
Face value is meant for accounting purposes to find out the equity share capital of the business and the value determines the buying price which is payable for buying the shares. However, book value and market value help in the determination of market sentiments for the corporate. Here’s below –
- If the market value is lower than the book value it means that investors don’t believe in the profitability of the company.
- If the market value is higher than the book value it shows that the market values the company’s potential to generate good profits.
- The face value will come to original values which were reported at IPO time when a listed company goes for consolidation
So, before you invest in shares, understand the concept of face value, book value, and market price so that you can strategize your investments.