Beginners in the financial markets may often be so focused on learning complicated jargon that they overlook the significance of fundamentals. If you have been guilty of this common mistake, it is never too late to get back to the basics — which is precisely what we will be doing in this article. Let us decode the meaning of three fundamental terms: book value, face value, and market value.
Difference between face value, book value and market value
The terms market value, face value and book value may sound quite similar, but they mean different things. To better understand the differences between the book value, face value and market value, check out the differences between these metrics.
Face value
The face value is the par value or the nominal value of any financial security or instrument. Bonds and stocks are some of the most common examples of instruments that have a face value. This value is decided by the entity that issues the instrument. So, in the case of stocks, the face value is determined by the company. For bonds issued by the government through the Reserve Bank of India (RBI), the central bank decides the face value.
The face value is typically fixed unless the issuing entity decides to revise this number. Such revisions are more common for stocks (during stock splits or mergers) than bonds.
Book value
The book value in the stock market is often misinterpreted as the market value or the face value. In the simplest terms, it is the net value or net worth of a company. The practical significance of the book value is best represented during a period of liquidation when a company sells its assets, repays its liabilities, and ceases to operate.
At this juncture, the book value represents the value of the assets that the company’s shareholders receive upon liquidation. It is calculated according to either of the formulae shown below.
Book value per share = (Total assets – Total liabilities) ÷ Total number of shares issued by the company
Or
Book value per share = (Equity share capital + Reserves and surplus) ÷ Total number of shares issued by the company
The book value in the stock market fluctuates as the values of the assets and liabilities in the company change. Nevertheless, while it is not fixed like the face value, it changes less dynamically or frequently than the market value.
Market value
The market value of a stock, bond or any other financial instrument is the price at which the security is traded in the open market at any given point in time. Depending on the security’s liquidity, demand, and supply, the market value may fluctuate significantly or not at all. The more the market value fluctuates, the more volatile a security is deemed to be.
Typically, the market value of a security is higher than its face value. However, penny stocks are a notable exception to this because they are often priced below Rs. 50 and may have market values that are lower than their face values.
Understanding the significance of the face value, book value and market value
The market value, face value and book value each have their own role in the market. Here is why they are all significant in different ways.
Why the face value is important
The face value is crucial for calculating the maturity value of debt instruments like bonds. It also plays a key role in accounting and legal matters that pertain to such securities.
Why the book value is important
The book value is a critical metric in determining if a company is overvalued or undervalued. It holds particular significance for investors — especially those with long-term outlooks.
Why the market value is important
The market value is important for traders and investors because it determines their profits or losses in the markets. It is highly volatile and depends on intrinsic and extrinsic factors.
Face value vs book value vs market value: The key differences
Now that you know the meaning and significance of the market value, face value and book value, it is important to check out how they compare against one another. The table below shows you the differences between the book value, face value and market value.
Particulars | Face value | Book value | Market value |
Meaning | The nominal value of a financial instrument, like a bond or stock certificate | The net value of a company's assets, minus its liabilities, as per the balance sheet | The current price at which an asset is traded in the open market |
Usage | Used mainly for stocks and in bonds to denote the repayment value at maturity | Used by investors to understand a company's value based on its financial statements | Used to understand the current value of a company or asset, reflecting market perception and demand |
Price determination | Set by the issuer and printed on the certificate | Assets minus liabilities, divided by the number of outstanding shares | Determined by supply and demand in the market; varies with market conditions |
Stability | Fixed and does not change over time | Can change over time as a company's assets and liabilities change | Highly variable, can change rapidly due to external factors like market sentiment |
Relevance | Important for bond investors to know what they will get back at maturity | Helpful for investors assessing a company's financial health | Crucial for investors looking to buy or sell, as it represents real-time value |
Conclusion
Now that you are aware of the meaning of these terms and the key differences between book value, face value and market value, you can factor them into your trading or investment decisions accordingly. You can rely on various free online resources to track these values in real time.
