Accounting

Difference between book value and market value

Main difference

The main difference between the book value and the market value is that the book value of an asset gives its book value, which is nothing more than the historical cost less accumulated depreciation / amortization, and the market value of an asset. represents the real market price of the asset. , which is listed on the market.

Book value vs. market value

The vision or accounting concept of recording the price of an asset class is known as book value and, on the other hand, the discount that the buyer or investors give for a specific asset class known as market value. The amount that investors will acquire (all assets minus all liabilities) during liquidation is called the book value. The market price, as decided by investors or traders who control the financial markets as a whole and value an asset based on the fundamentals of that particular asset class. Accountants calculate the price if the book value is It is inclined to move within each quarter based on the accounting treatment, while price fluctuation is very common in the case of market value. Only the fundamentals of the particular asset play an important role during the calculation of the book value, and the financial market plays an important role in determining the market value. Depreciation is an integral part of the book value, while depreciation hardly plays any role in the market value.

Comparative chart

Value in books Market value
The book value is the value recorded in the books of the company for any asset. Market value is the maximum price at which an asset or security is sold in the market.
Reflects
Company equity Current market price
What is it?
It is the real value of the asset or the company. It is the highest estimated value of the asset or company.
Frequency of fluctuations
Infrequent Frequent
Calculation base
Material or tangible assets present with the company. Tangible and intangible assets that the company has.

What is book value?

The book value of a property or asset equals its equity value or book value on the balance sheet, and companies calculate that you are offsetting the asset with its collected depreciation. The book value is also the value of the net worth of a company estimated as total assets less intangible assets (patents, goodwill) and liabilities. For the principal outlay of an investment, the book value can be net or gross of expenses such as business costs, sales taxes, service charges, etc. While the book value of a property or asset can remain the same over time through accounting measures, the book value of a business can also increase from the accumulation of profits produced through the use of assets.

Uses of book value

  • Provides the total value of company assets that shareholders would theoretically receive if a company were liquidated.
  • When compared to the market value of the company, the book value can indicate whether a stock is undervalued or overvalued.

What is market value?

Market value is the cost or rates that an asset would generate in the market. Market value is also commonly used to relate to the market capitalization of a publicly traded company and is obtained by multiplying the number of its outstanding shares by the current share price. Market value is easier to determine for exchange-traded instruments such as stocks and futures, as their market prices are widely spread and readily available, but it is slightly more difficult to determine for over-the-counter instruments such as fixed income securities. . Despite this, the greatest difficulty in determining market value lies in estimating the value of non-monetary assets such as real estate and businesses. which may require the use of real estate advisers and business valuation experts, respectively. The market value of a company is a good sign of investors’ ideas about its business prospects. Market value determined by the valuations or multiples agreed by the investors to the companies. The higher the estimates or valuations, the higher the market value.

Market value can vary greatly over time and can be substantially influenced by the business cycle. Market values ​​fall during bear markets that accompany recessions and rise during bull markets that occur during economic expansions. Market value also depends on many other factors, such as the industry in which the company operates, its profitability, the debt burden, and the general market environment.

Key differences

  1. The value of property or assets or securities as indicated by the company’s books is known as the book value. Market value is the present value of the business or any asset in the market in which it was sold.
  2. Book value refers to the equity value of the company. Rather, market value indicates the current market value of the business or an asset.
  3. When estimating book value, only tangible assets are taken into consideration, but market value considers both tangible and intangible assets.
  4. Book value is the actual value of a business asset, while market value is just an expected value of the business or asset’s market value.
  5. When the book value is greater than the market value, there is a profit, but if the book value is much less than the market value, there is a loss. However, if these two values ​​match, there is a zero profit situation, with no loss for the company.
  6. The book value changes annually, but the market value changes every moment.

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