The Difference Between Market Value and Book Value is something you need to know if you want to make money from your stock trading ideas. But don’t worry:
The differences between market value and book value are very easy to grasp. So…
In this blog post not only will you learn the difference between market value and book value. Then, you’ll also see how you can use the difference between these two values to find profitable stock trading and investing opportunities. Cool?
The Difference Between Market Value and Book Value
Market value and book value could both be interpreted by investors as “what a company is worth.” But the difference is, market value is what the open market says the asset is worth right now… whereas… book value is what the accountant says the asset is worth at the end of each accounting period. So that’s the main difference between market value and book value in theory.
But let’s illustrate the difference between market value and book value in practice:
If you’re trading stocks online, the market value is equal to the ask quotation you see on your brokerage screen. Market value is literally what you will get if you put in a market order to sell your stock. Market value corresponds to the market capitalization and is the price you can get for your stock (or other liquid asset) right now. Market value is the going market rate. It is the current stock price of your ticker. Pretty simple, right?
On the other hand…
Book value is what all the assets of your company are worth, according to the balance sheet. So if you broke up your company and sold everything it owned (property, equities, inventory) book value is the total amount of money you would get back. Warren Buffett’s shareholder letters describe book value as a rough proxy for the intrinsic value of the company, which is why it is such a big part of fundamental analysis. So far so good?
The Time Difference Between Market Value and Book Value:
There is one more important difference between market value and book value you should know about…
Whereas market value is updated whenever the stock market is open, book value is only updated every quarter after the public earnings report. A lot of value investors will follow the book value each quarter to see if the company is building up the assets or losing value.
So now that you understand the relation of these two values, here is how you can use the difference between market value and book value to make smarter stock trading decisions…
Using The Difference Between Market Value and Book Value To Find Stock Ideas:
If market value is the present fair value of a company. And book value is what the assets of the company are worth… then Price to Book Ratio is how you analyze the difference between market value and book value.
And here’s how you can use P/B ratio to find good stock ideas:
When Price to Book ratio is greater than one (P/B > 1) the investment you are analyzing are trading at a premium to what the assets of the company are worth. While this might sound weird at first, it is very common on Wall Street for market value per share to exceed book value per share. This is because analysts and shareholders expect the company to grow earnings in the future (so they are basically betting on a future book value that is higher). If you are thinking about short-selling stocks, finding stocks where P/B is very high (5+) and growth is slowing can be a great place to start – since there are no hard assets to support the market price (just expectations).
When Price to Book ratio is less than one (P/B < 1) the investment you are analyzing is trading at a discount to what the assets of the company are worth. In this case, analysts are so negative about the future earnings of the company they believe it will just continue to lose money until the stock (and all of the assets in the company) go to zero. I know that might sound extreme to you but, investors and stock traders can be a fickle crowd! Yet this is usually where value investors and bargain hunters step in – because any reversion to profitable operations can send the market price of these under-valued stocks soaring!
So that’s how you can use the difference between market value and book value to find profitable stock ideas. If you need a little more clarity just watch this short video below…
The Difference Between Market Value and Book Value [VIDEO]:
Hopefully by now you understand the difference between market value and book value, as well as how you can use these metrics to find profitable stock ideas. Remember, a high market value relative to book value might indicate that a stock is over-valued (especially if growth is slowing). On the other hand, if the stock is trading below book value on the open market then you might have found a potential bargain opportunity.
Let me know if you have any questions about the difference between market value and book value in the comments below!
And By the Way: If you want more stock ideas based on these fundamental valuation criteria, then I encourage you to sign up by entering your email in the form below. You’ll get lots of exclusive stock investment ideas you can’t find on the website…