What are the types of value of a share. Face, Market & Book.

 

Investing in equity shares is a lucrative investment avenue because of two main benefits. One, share trading is extremely liquid. One can sell off the shares and realize cash in the shortest possible time. Two, the potential returns are attractive. You can earn a windfall if you know which shares to pick for investment. However, through investing in equity shares has good profit potential, many are stumped with some common jargons related to sharing trading. For starters, take the instance of understanding the face value, market value, and book value of shares.

What is the face value?

The face value of shares is the value at which the share is actually listed on the stock market. Face value is also called par value and can be found in the share certificate.

What is market value?

Market value is the value at which the share is traded on the listed stock exchange. It represents the company’s worth. It can be calculated using the following formula –

Market value per share = the total value of the company in the market / total number of shares issued by the company

What is the book value?

Book value, in literal terms mean the value of the share in the company’s books. It depicts the amount per share the shareholders can get if the company is liquidated and its assets are sold off to pay the liabilities. Thus, book value is calculated using the following two formulas:

Book value per share = total assets – total liabilities / total number of shares issued by the company

Or



Book value per share = Equity share capital + reserves and surplus/total number of shares issued by the company

Difference between the three concepts



Interpretation of these concepts for an investor


The face value of the share is least meaningful to you, the investor. It is meant for accounting purposes to find out the equity share capital of the business. The value determines the purchase price which is payable for buying the shares and also the value realized when you sell the share. However, book value and market value help in the determination of market sentiments for the company. Here’s how –

·         If the market value is lower than the book value it means that investors don’t believe in the profitability of the company. Though the company has enough profit margins, investors are either unaware of the same or they believe that the company has no future scope of earnings.

·         If, on the other hand, the market value is higher than the book value it shows that the market values the company’s potential to generate good profits.

So, before you invest in shares, understand the concept of face value, book value, and market value so that you can strategize your investments.


Happy Investing!!!

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