DEFINITION of 'Book'
A book is a record of all the positions held by a trader. This record shows the total amount of long and short positions that the trader has undertaken. Traders maintain a book to facilitate trades for their customers and to profit from the spread between their bid and ask prices.
"Book" is also used to define the book value of a business or a list of customers.
BREAKING DOWN 'Book'
For example, a trader with a very simple book may hold two positions: one long position of XYZ stock worth $1,500 and a short position worth $1,700. Keeping an up-to-date book allows a trader to be aware of his positions and the risk exposure related to those positions.
Many traders make a market in a particular stock or bond, which means that they facilitate transactions for customers. Traders use their firm's capital to maintain a book of long and short positions and provide a bid and ask price to investors. The bid represents the price that the trader pays for a security and the ask price is the sale price offered by the trader.
How a Spread Works
A trader attempts to profit on the difference between the bid and ask prices. In this case, the trader has long position of XYZ stock worth $1,500 (100 shares purchased at $15 per share) and a short position worth $1,700 (100 shares sold at $17 per share). The trader eventually must deliver the 100 shares sold in the short position to a buyer. Assume that the current bid is $16 and the ask price is $17.50, which means that the trader can profit on the spread between the bid and ask prices ($1.50 per share). Bid and ask prices change constantly, based on market conditions and customer orders.
Factoring in Book Value
The term "book" also refers to book value, which is an accounting term used to describe a key measurement of company value. Book value is related to the balance sheet formula of (assets – liabilities = equity). The term book value is another way of defining equity, and both terms refer to company assets minus liabilities owed by the firm.
Book value per common share of stock is a ratio that measures the amount of equity the company maintains per share of common stock. In theory, if the company sold all of its assets and paid off all of its liabilities, the amount remaining would be equity. If there is more equity available per common share, then each share is more valuable to a stockholder.
Examples of a Company Book
For many businesses, the order book represents customer orders that will be filled in future months. The dollar value of the order book is an indication of future sales and the growth prospects of the business.
"Book" can also refer to the customer list maintained by a particular salesperson or small business owner.