Market value definition

Difference between market value and book value

While the market value reflects what a business is worth according to market participants, book value reflects what a business is worth according to its financials (its books). The calculation for the book value of a company is its total tangible assets minus its liabilities.

Example of market value

To calculate the market value of a company, you would take the total shares outstanding and multiply the figure by the current price per share. For example, if ABC Limited has 50,000 shares in circulation on the market, and each share is priced at £25, its market value would be £1.25 million (50,000 x £25).

Pros and cons of market value

Pros of market value

Market value can give an indication of whether a company’s shares are overvalued or undervalued, depending on the difference between market value and the fair value. Traders and investors will often buy and sell stocks based on their findings. This allows them to take advantage of the disconnect between the two prices when the market corrects itself.

Cons of market value

To establish the market value of a share, there has to be historical data that can be used to compare the market value of one share against another. Without a comparable figure, a company’s value is not a useful indicator of whether market participants should be interested in the stock. There has to be a benchmark against which other market values are measured.

Market value can also be quite an objective measure, as share prices are determined by fluctuations in supply and demand. This means that the market value of an asset only represents what someone is willing to pay for it, rather than its intrinsic value.