What is the actual value of a stock? Is it its face value, or, market value, or book value? These figures are important and mentioned transparently for listed companies. Let us learn about face value, market value and book value of stocks in detail.
What is Face Value (FV)?
1. Face value in stocks
Definition: The face value of a share of stock is the nominal value assigned to it by the company at the time of issuance. This value is typically a small amount such as ₹1, ₹2, ₹5 or ₹10 per share.
Purpose: It is primarily used for accounting purposes and is the basis for determining the company’s share capital. It does not reflect the market price or trading value of the stock.
Example: If a company issue shares with a face value of ₹10 each, this means each share has a nominal value of ₹10. This value is recorded in the company’s books and is used to calculate the total share capital.
Where to find: Face value is usually mentioned in the company’s financial statements but it is not often highlighted since it is less relevant than market price.
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2. Face value in bonds
Definition: The face value of a bond (also known as the principal or par value) is the amount that will be repaid to the bondholder at maturity. It also determines the bond’s interest payments.
Purpose: It represents the amount of money the issuer agrees to pay back to the bondholder upon maturity and is used to calculate interest payments (coupons).
Example: If an Indian government bond has a face value of ₹1,000, the issuer will repay ₹1,000 to the bondholder at maturity plus any interest payments specified.
Where to find: Face value is typically stated on the bond certificate or in the bond’s documentation. It is also often found in the bond’s summary on financial news websites or bond market platforms.
3. For other financial instruments
Definition: In various financial contexts, face value can refer to the nominal or stated value of instruments like debentures, certificates of deposit or even currency notes.
Purpose: It serves as the reference point for transactions, accounting and issuance of these instruments. While face value is less important for assessing the value of stocks in the market, it is crucial for understanding the structure of bonds and other financial instruments.
What is Book Value (BV)?
Definition: Book value is the value of an asset or company as recorded on the balance sheet.
BV of a company = Total Assets (-) Total Liabilities
BV of an individual asset = Original Cost (-) Accumulated Depreciation
Where to find it?
Companies: Book value can be found on the company’s balance sheet, which is part of its financial statements. This information is available in annual reports, SEC filings (like 10-Ks) or financial databases.
Assets: For specific assets, book value can be found in the company’s fixed asset register or depreciation schedules.
What is Book Value Per Share (BVPS)?
It indicates the value of each share if the company were liquidated at book value. This metric helps investors assess the intrinsic value of a share based on the company’s accounting records and compare it to the current market price of the share.
Formula: BVPS = Book Value / Number of Outstanding Shares
Example: If an Indian company has 1 crore shares outstanding and has total assets worth ₹50 crore and total liabilities amounting to ₹30 crore
Book Value = 50 – 30 = ₹20 crores
BVPS = 20 / 1 = ₹20 per share
What is Market Value (MV)?
1. Market Value (MV) for stocks
Definition: The market value of a stock is the price at which it is currently trading on a stock exchange. It is determined by the market through the buying and selling activities of investors.
Formula: Market Value = Current Share Price × Number of Outstanding Shares
Where to find: Market value is readily available on financial news websites, stock market apps or the stock exchange where the stock is listed.
Example: If a company’s stock is trading at ₹100 per share and there are 2 crore shares outstanding,
MV = ₹100 × 2 crore = ₹200 crore
2. Market Value (MV) for bonds, real estate and other assets
Definition: It is the price at which a property or bond can be bought or sold in the open market under normal conditions. The bond’s market value fluctuates based on interest rates, credit quality and market conditions. The real estate market value is determined through market comparables, appraisals and recent sales of similar properties.
Where to find: It can be estimated through appraisals or recent sales of comparable assets.
Example: If a bond with a face value of ₹1,000 is currently trading at ₹950, its market value is ₹950.
What purpose do face value, book value and market value serve?
Each value offers a different perspective and helps in making informed financial decisions.
Face Value: The face value of a share is generally of minimal significance to investors, as it primarily serves bookkeeping purposes. In contrast, both book value and market value offer valuable insights into a company’s financial health and investor sentiment.
Book Value: The book value reflects the company’s net worth by subtracting total liabilities from total assets, giving an idea of its intrinsic value based on historical costs.
Market Value: The Market Value represents the current price at which the company’s shares are trading, reflecting investor perceptions and market conditions. It reflects the current worth of a company’s equity as perceived by the market.
By comparing a company’s book value to its market value, investors can assess whether the stock is overvalued or undervalued. This comparison helps investors understand how the market views the company relative to its actual financial position and earning potential.
How are the face value, book value and market value used?
Usage of face value in –
Bonds: Investors use face value to understand the bond’s repayment amount and interest yield.
Stocks: The face value is mostly used in corporate accounting and legal contexts rather than investment analysis.
Usage of book value in –
Intrinsic value assessment: Investors use book value to gauge whether a company’s stock is trading below or above its net worth. It’s especially useful for evaluating companies with significant physical assets, like manufacturing firms.
Comparison with market value: Comparing book value to market value helps identify if a stock is undervalued or overvalued relative to its financial position.
Usage of Market Value in –
Investment decisions: Investors use market value to determine if a stock is priced appropriately based on current market conditions. It’s also crucial for assessing the company’s relative size in the market.
Market sentiment: Changes in market value can indicate shifts in investor sentiment, expectations of future performance, or reactions to external events.
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In Summary
The face value, book value and market value of stocks are important stock factors that can help you determine the stock’s valuation. It is important to understand them and know the difference between them.
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