Market Value vs. Book Value: Understanding the Difference

In this article, we will discuss market value vs book value and determine the key similarities and differences between them. Market value and book value are fundamental concepts in accounting and finance. They represent different aspects of the value of an asset.

Market value is the price currently paid or offered for an asset in the marketplace. Essentially, the market value of an asset is a quantified reflection of the perception of the value of the asset by the market.

On the other hand, book value is a concept related to the value of an asset as recognized by a company on its balance sheetBalance SheetThe balance sheet is one of the three fundamental financial statements. The financial statements are key to both financial modeling and accounting.. Book value equals the original purchase cost of an asset adjusted for any subsequent changes including depreciation, amortizationAmortizationAmortization refers to the process of paying off a debt through scheduled, pre-determined installments that include principal and interest, or impairment.

What is Market Value?

Market value is the current prevailing price for an asset in the marketplace.

Unlike the more stable book value, which is rarely adjusted, market value is highly dynamic. For example, the market value of a publicly-traded company may fluctuate every second due to the fluctuations in its stock price.

Market value can be easily determined for highly liquid assets such as equities or futuresFutures ContractA futures contract is an agreement to buy or sell an underlying asset at a later date for a predetermined price. It’s also known as a derivative because future contracts derive their value from an underlying asset. Investors may purchase the right to buy or sell the underlying asset at a later date for a predetermined price.. The financial assets are generally traded on centralized exchanges, and their prices can be easily discovered.

However, the determination of the market value of illiquid assets is a challenging process. The absence of a constant network of buyers and sellers, as well as the complexity of some of the underlying assets (think about real estate or artwork), requires a time-consuming process to identify the reasonable market value.

The term “market value” is sometimes used synonymously with “market capitalizationMarket CapitalizationMarket Capitalization (Market Cap) is the most recent market value of a company’s outstanding shares. Market Cap is equal to the current share price multiplied by the number of shares outstanding. The investing community often uses the market capitalization value to rank companies” of a publicly-traded company.

What is Book Value?

Book value (also known as carrying value or net asset value) is an asset’s value as recorded on a company’s balance sheet. In essence, book value is determined as the original cost paid for the asset’s acquisition, adjusted for any depreciation, amortization, or impairment attributable to the asset.

From basic accounting principles, we can derive that the book value helps determine the value of a company’s equity. In this sense, we’re talking about the equity value that the shareholders should receive in case of the company’s liquidation.

In addition, book value is frequently used to determine whether an asset is under- or overpriced. It can be determined by comparing the difference between the asset’s book and market values.

For example, one of the key applications of the difference between an asset’s book and market values is the company’s valuation. If the company’s book value exceeds its market value, it can be an indicator of a loss of confidence in a company from the investors. It can be the result of the company’s business problems, poor economic conditions, or simply investors erroneously undervaluing the company. Alternatively, if the company’s market value exceeds its book value, it is an indicator of the investors’ belief in its growth potential.

A significant variation between market value vs book value may arise if a company purchased an asset in the past that has markedly increased in value.

Additional Resources

We hope you’ve enjoyed reading CFI’s explanation of market value vs. book value. CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)®Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program, designed to help anyone become a world-class financial analyst.

To keep learning and advancing your career, the following resources will be helpful:

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