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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.

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