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Finance: What is the Difference Between Market Value and Book Value? 42060 Views


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What is the difference between market value and book value? These two figures describe what a company is worth. Book value does this by finding the difference between what they have and what they owe. Market value finds a company’s worth solely by looking at their stock market value (their outstanding shares multiplied by share price).

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Transcript

00:00

finance a la shmoop. what's the difference between market value and book

00:06

value? ever tried to sell sunscreen to a white Walker? yeah [zombie walks through snow]

00:11

probably won't make much money. want to know why? now learning about the

00:14

difference between market value and book value will tell it all. first market

00:18

value it's what the market thinks a stock or a bond or a home or a used car

00:23

or whatever is worth. the market the crowd the crazy people.

00:28

all right here's an example of market value gone wild in the 17th century [crowd then tulip pictured]

00:31

Denmark, they valued a single tulip at 10 grand and it didn't even give them a

00:36

triple espresso buzz. go figure. but that's how the market of buyers

00:40

valued that tulip so that's what that tulips market value was. that's what the

00:45

market said it was worth. Book value however is a completely different in a [man walks through art gallery]

00:50

somewhat more rational animal .book value is the dollar amount that a company can

00:54

point to which reflects an asset they physically own. imagine buying a tractor

01:00

factory for 80 million bucks. it depreciates in value 10 million dollars

01:03

a year for 4 years then depreciates that 2 million dollars a year after that. so

01:08

after five years that factories Book value ie the amount we're guessing its [chart showing depreciation]

01:13

value as actually being is 38 million dollars. but lo and behold the factory

01:18

itself is made of Valyrian steel .you know that stuff from Game of Thrones

01:22

that kills White Walkers. so after eight years and one white Walker invasion of

01:27

Chicago later you decide to sell the factory itself because well the stuff [zombies walk in front of skyscrapers]

01:31

it's built out of, that rare material, is suddenly worth a lot more than the

01:35

factory .now after eight years the book value of the factory might be 32 million

01:39

dollars, but some bitter on eBay of tractor companies offers you a hundred

01:43

million bucks! and you accept! that hundred million dollars was the market [man sits behind computer screen]

01:48

value of the tractor factory even though the book value said it was worth a whole

01:53

lot less. securities actually work the same way. they are traded regularly in a

01:57

market place and they reflect their market value even though the book value

02:02

at which they are held is often a lot less. and what about Chicago well let's [smiling man carries bags of cash]

02:06

just say no one's selling much sunscreen these days.

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