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Knowing terms like face value, book value and market value can help one understand many other concepts of the stock market.
The first thing you need to know is that book value and market value can be calculated for a company and also for a single share of that company. But the face value will be only for a share of the company.
You’ll hear the terms like book value of a company, book value per share of a company, market value of a company, market value of the share of a company, and face value of the share company.
Will you hear the term, ‘face value of the company’? The answer is no, you won’t; as there is no term like the face value of a company that exists in the world of the stock market.
What is Face value?
Face value is the value of a share that is written on the face of the share certificate.
A share’s face value is decided by the company’s promoter when they start the company. Among all three values of a share, i.e. face value, book value and market value, face value never changes or we can say that face value doesn’t change frequently until the company announces a stock split.
The face value of a company’s share can be at least Rs.1 or in the multiple of Rs.1 like Rs.2, Rs.5, Rs.10 and so on which means you will never see the face value of any company’s share in the form of a decimal.
Most Indian companies prefer to have a face value of Rs.10 as it makes their accounting easy.
Face value is also known as Par value and Nominal value.
How to calculate Face value?
As the promoters of a company decide the face value for the shares but one can calculate the face value of a share, if he/she knows the following formula:
Importance of Face value
An investor has nothing to do with the face value. A trader keeps an eye on the market value of a share and a long-term investor or growth-term investor considers the comparison of book value and market value for investment.
Neither investors nor traders care about face value. Poor guy!
But, face value has gained respect in another case. What is that? Let’s discuss.
You know that other than capital appreciation, dividends are something that generates income for investors. And companies announce dividends in percentage terms like 50% and 100%.
But wait, 100% of what? Many people think that 100% of the share price. Now, think for a moment, of the share price of MRF stock. At the time of writing this article, which is the end of March 2022, the share price of MRF stock is around Rs.65,000. Say, MRF announces a 100% dividend and someone thinks 100% of 65,000 which is the share price itself i.e. Rs.65,000. If the company gives this much amount per share, won’t it be bankrupt?
As the share prices (market value of share) change frequently, the dividends are announced by keeping the face value as the base. MRF face value is Rs.10 (which is the multiple of Rs.1 and isn’t a decimal number, remember!) and 100% of Rs.10 is Rs.10.
So, if MRF company announces a 100% dividend; you’ll get Rs.10 per share, not Rs.65,000 per share. Got it?
What is Book value?
Do you remember the second paragraph of this article? There we talk about the terms like ‘book value of company‘ and ‘book value per share’.
Yes, the terms ‘book value of company’ and ‘book value per share’ are very different from each other. But, everywhere you’ll find that instead of using the phrase ‘book value of company’ people are using just ‘book value’.
So, long story short, whenever you see the phrase ‘book value’ see it as ‘book value of company’ and don’t interpret it as ‘book value per share’, Okay!
As book value is just an accounting term, you can define it as an accounting value of a business according to its books and accounts and it can be said that a book value is what shareholders would get if a company sold out all its assets and paid all its debts and liabilities.
Now, what is the book value per share?
We have just discussed that after selling out all the assets and paying the debts and obligations of a company, what is left is the book value and this is the amount that shareholders would get, Right?
Now, suppose a company has 100 outstanding shares and its book value is Rs 200. The outstanding shares are 100 but the number of shareholders of these shares can be ‘n’. Somebody will have 10 shares, some will have 20 or 5 and so on. You are also one of them and you have 1 share of that company.
Rupees 200 is the amount all the shareholders would get, but how much amount will you get? For this, you need to divide Rs.200 by 100 shares which will be Rs.2 per share. And this is book value (Rs.2) per share (1 share).
Book value per share is shortly written as BVPS.
How to calculate Book value?
The calculation for the book value of a company:
The calculation for book value per share (BVPS):
Importance of Book value
Investors know the importance of analyzing the financial ratios of a company before investing in it. Financial ratios come under the fundamental analysis.
One of such financial ratios is the P/B ratio. In this ratio, you divide the market value by book value and after getting the ratio, you decide whether it is a lower P/B ratio or a higher one and decides on investment by comparing it with some standards like the industry’s P/B ratio.
This is how book value helps to make investment decisions.
What is the Market value?
Again, when you say market value, the market value of what? Are you talking about ‘market value of a company’ or ‘market value of a share of a company’?
The market value of a company means the market capitalization of a company. And the market value of a share (or market value per share) is simply the current share price of that company. So simple, isn’t it?
Now, the question is, what is market capitalization? The market cap (short for ‘market capitalization) of a company is equal to the share price multiplied by the number of shares outstanding of that company.
Doesn’t the definition of market capitalization sound like a formula? Yes, it’s the exact formula of the market cap or market value of a company.
How to calculate Market value?
Importance of Market value
Did you hear the terms large-cap, middle-cap, or small-cap companies? Large-cap companies mean companies with a large market capitalization. The same context for the middle-cap and small-cap companies.
Now, it’s whole another topic how to decide the range of market cap to segregate companies as large, mid, and small companies.
The point is the market value of a company i.e. market capitalization helps investors to decide which range of companies to invest in. As a large-cap company would be more renowned and established than a mid-cap or small-cap company and have less risk to invest at the same time. On the other hand, small-cap companies have high risk but remember high risk, high return.
So, this is how the market value of the company helps in investment analysis.
How market value of a share i.e. share price of the stock has any importance? Ask traders. They just focus on charts and patterns of candlesticks and these charts contain share price on its Y-axis. Simply say, companies list themselves on the stock exchanges to know the value of their securities and this value is nothing other than share price aka market value of the share.
Face value is the value of a share written on the face of its share certificate. And this is the value of a share that the company’s promoters decide at the start of the company.
The book value of a company or simply book value is the amount that shareholders would get if a company sold out all its assets and paid all its debts and liabilities. BVPS (Book value per share) is the book value of a company divided by the number of outstanding shares of that company.
The market value of a company is its market capitalization and the market value of a share is the share price.
I hope you got the answer to your question, ‘What are face value, book value, and market value?’
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