Loading the player...
A:

Book value is the price paid for a particular asset. This price never changes so long as you own the asset. On the other hand, market value is the current price at which you can sell an asset.

For example, if you bought a house 10 years ago for $300,000, its book value for your entire period of ownership will remain $300,000. If you can sell the house today for $500,000, this would be the market value.

Book values are useful to help track profits and losses. If you have owned an investment for a long period of time, the difference between book and market values indicates the profit (or loss) incurred.

If you purchased Amazon (AMZN) shares two years ago for $530 per share and today it is trading for $745 per share, the former is the book value and the latter is the market value. Your unrealized profit will be Market value - Book value = $745 - $530 = $215 per share.

The need for book value also arises when it comes to generally accepted accounting principles (GAAP). According to these rules, hard assets (like buildings and equipment) listed on a company's balance sheet can only be stated according to book value. This sometimes creates problems for companies with assets that have greatly appreciated - these assets cannot be re-priced and added to the overall value of the company.

For more on this topic, check out the articles Using the Price-to-Book Ratio to Evaluate Companies and How to Analyze a Company's Financial Position.

RELATED FAQS
  1. What is the difference between book value and market value

    Learn the differences between book value and market value, and see how investors use each type to determine if a company ... Read Answer >>
  2. What is the difference between book value and carrying value

    Dig deeper into the definitions of carrying value and book value, and learn to differentiate between their various financial ... Read Answer >>
  3. What is the difference between a company's book value per share and its intrinsic ...

    Book value and intrinsic value are two ways to measure the value of a company.In simple terms, book value is based on the ... Read Answer >>
  4. Who uses book value to estimate the value of a company?

    Understand the meaning of the term "book value" and how it is used by market analysts to estimate the worth or market value ... Read Answer >>
  5. What is the difference between book value and salvage value

    Discover the difference between two valuations, the book value and the salvage value, and the respective purpose of each ... Read Answer >>
Related Articles
  1. Investing

    The Difference Between Book and Market Value

    Book value is the price paid for an asset. It never changes as long as the asset is owned. Market value is the current price at which the asset can sell.
  2. Investing

    Market Value Versus Book Value

    Understanding the difference between book value and market value is a simple yet fundamentally critical component to analyze a company for investment.
  3. Investing

    Book Value: How Reliable Is It For Investors?

    In theory, a low P/B ratio means you have a cushion against poor performance. In practice, it is much less certain.
  4. Investing

    Investing By The Book

    Buying below book value can provide investors with a safe and consistent investment approach.
  5. Investing

    Using The Price-To-Book Ratio To Evaluate Companies

    The P/B ratio can be an easy way to determine a company's value, but it isn't magic!
  6. Investing

    Deep Discount-To-Book Value Stocks

    With the right company, buying at a discount-to-book value could prove fruitful.
  7. Investing

    Understanding Book Value

    Book value is a component in many ratios that investors use to evaluate stocks. Find out how it is calculated and what it reveals about a company.
  8. Investing

    Understanding The P/B Ratio

    A price to book ratio can tell an investor how the book value of a company measures up to its stock price. Find out how this ratio is calculated and how it can inform your investment decisions.
  9. Financial Advisor

    5 Must Read Finance Books

    We'll look at 5 financial books that are perennial favorites and what has made them so popular.
RELATED TERMS
  1. Book Value

    1. The value at which an asset is carried on a balance sheet. ...
  2. Price to Tangible Book Value - PTBV

    A valuation ratio expressing the price of a security compared ...
  3. Price-To-Book Ratio - P/B Ratio

    Price to Book Ratio (P/B Ratio) is a ratio used to compare a ...
  4. Public Book (Of Orders)

    A book containing all of the buy and sell orders for a specific ...
  5. Trading Book

    The portfolio of financial instruments held by a brokerage or ...
  6. Book-To-Market Ratio

    A ratio used to find the value of a company by comparing the ...
Hot Definitions
  1. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  2. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  3. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
  4. Long Run

    A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all ...
  5. Quasi Contract

    A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A normal ...
  6. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
Trading Center