There are several elementary terms related to stocks that might be confusing for many beginners. Market value, face value, and Book Value Per Share are some of the terms that are often used interchangeably by those who are yet unfamiliar with them. But the three of these terms are totally different from one another and establishing a distinction between them is important if someone wants to start investing and trading soon. So, let us understand these terms and what valuable insights they can provide to an investor.
The market value of a company refers to the current value of the shares of the company in the stock market. The word ‘current’ should be stressed here as it designates a value that is there only for the present moment. As the market value of the shares keeps on fluctuating, they are never fixed. It refers to the price at which you can buy the share units of a company at a particular moment.
Market capitalization or the total value of the shares in the market can be easily calculated by multiplying the price of a single share unit by the total number of outstanding shares. For instance, if the market value of a share unit is Rs 50 and the number of shares issued is 10,000 units then the market capitalization of the company would be 50x 10,000 = Rs 5,00,000. Again, the market capitalization keeps on fluctuating throughout the time the shares are listed on the market.
Face value of a company refers to the value of the company as it is given in its books and is also included in the share certificate. The face value of a company is not influenced by the fluctuations of the share market. On the contrary, the company decides on its own at what price they are going to issue the stocks in the market. As a result, the face value of a company is fixed unless there is a split in the stocks.
In general, the face value of a company is less than its market value. This is because, in the share market, the value of a company is usually anticipated to rise. So, if a share unit is given the face value of Rs 20, it can easily be the case that it is being traded at Rs 100 in the stock market. But the reverse can also be true, especially in the case of penny stocks that do not stand as good a chance to rise in value.
The market value of the company is usually higher than its face value because the stock values are expected to rise.
The face value of a company has nothing to do with its market value. Even if the company is undergoing a loss and its share value is down in the market, the face value remains the same. The only way the face value of a company can change is when a split takes place in the stock. For instance, if the same number of stocks is valued at Rs 20 is split in the ratio of 1:1, the face value of the shares will go down by half from Rs 20 to Rs 10.
Book Value Per Share
To understand the Book Value Per Share, we will have to be clear about what is book value. Book value refers to the amount of money a company will receive if a situation arises of its liquidation. It is the value of the company when all the liabilities are cleared off. And when you divide the book value by the number of outstanding shares, the outcome will be Book Value Per Share. The formula to calculate Book Value Per Share (BVPS) is as follows:
BVPS = (Total Assets – Total Liabilities)/ Number of Outstanding Shares
To understand the Book Value Per Share more clearly, let us take an example. Suppose a company named XYZ has total assets of Rs 50 crore and the liabilities are 30 crores. A situation has arisen where the company is to be sold. The one purchasing the company can compute its book value by first subtracting the liabilities from the worth of assets. This will leave XYZ with a book value of Rs 20 crore. Now, if Book Value Per Share needs to be calculated, it will be necessary to find out the number of outstanding shares in the market. If XYZ’s outstanding shares are 1 crore units, then the company’s Book Value Per Share would be:
Book Value/ Outstanding Shares
So, the Book Value Per Share of XYZ would be 20 crore/1 crores = Rs 20.
Therefore, this is the generic difference between the terms. As it is evident, they are quite different from one another. For an investor, a knowledge of these terms will give him a clear idea about the different values of the company. For instance, with the knowledge of Book Value Per Share, an investor will know if a particular stock is undervalued or overvalued, and accordingly, he can make investments.