We often come across some terminologies such as Face Value, Book Value and Market Value. For a second we should understand that what does these terms mean?
Face value of shares or nominal value, is the value shown on the face of security and the share is actually listed in the stock market. Face value is also known as par value which is the legal capital of each share of stock held by an individual. Face value is the original cost of the shares as listed on the certificate.
Face value is not calculated; rather it reflects the face value in the form of shares depending upon the capital that a company wishes to raise from market. For example, when a company goes public, it can have a face value of Rs 10. And it may trade at a market price of Rs 500.
WHY FACE VALUE IS IMPORTANT?
Face value has a key role in a company. It is generally used for the purpose calculating interest on the shares and bonds. Also, for computing the market value, discounts, premiums and returns, etc the value of a share is taken into consideration. It is crystal-clear that understanding face value of shares is important to invest or trade hassle-free in the stock market. It is important to know that when it comes to stocks, face value generally has no relation to market price. Bond prices are mostly influenced by their face value.
Market value is the value at which the share is traded on the listed stock exchange. It represents the market capitalization of a publicly traded company. For example, if a stock is trading at a share price of Rs 400, then this is the market value per share of that company.
It can be calculated using the formula –
Market value per share = total value of the company in the market / total number of shares issued by the company
WHY MARKET VALUE IS IMPORTANT?
Market value is mostly referred by the market analysts and investors when they mention the value of a company. Since the market price of shares changes throughout the day, the market cap of a company also changes accordingly. It is a basic parameter which is widely used in calculations such as market cap with respect to sales. Market cap is used commonly while comparing similar companies because share prices are affected more by corporate actions like bonus, stock split, etc.
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 per share = Equity share capital + reserves and surplus / total number of shares issued by the company
WHY BOOK VALUE IS IMPORTANT?
When you divide the current price of the share of a company with its book value per share, you get P/B (price to book value) ratio. P/B ratio is a highly useful comparison tool while taking an investment decision based on various parameters. Book value is primarily important for investors using a investing strategy because it can enable them to find bargain deals on stocks, especially if they suspect that the company is undervalued and/or is poised to grow, and the stocks are going to rise in price.
Its utmost important for investors and traders to pay close attention to book value however, to the nature of the company and other assets that may not be well represented in the book value.
By now, the meaning of face value, market value, and book value should be crystal clear to you. All these three terms are different in each term and one should not get confused among them while studying any company in details.
In a nutshell, Market value per share is the current value at which the stock is trading in the market. Face value is the value of a company which is listed in its books and share certificate. And finally, the book value of a company is the total value of the company’s assets that shareholders will receive in case the company gets liquidated.