Book Value and Market Value Explained……

Occasionally I have the question asked, “what is the difference between book and market value”? I will briefly explain.

-Book Value- The book value is the amount that one has paid for a particular asset. As long as you own this asset the book value always remains the same.

-Market value- The market value of an asset is the current market price the asset could be sold.

An example of the difference is as follows. If you bought 100 shares of a stock last year at $10.00 per share the book value would be $1000.00. If the stock price today was $15.00 per share the market value would be $1500.00.

The calculation of book value when making multiple purchases would be the following. Lets say you bought a position in a stock last year. You bought 100 shares and the price was $10.00 per share. The book value would be $1000.00. You are very pleased with holding this particular stock because it pays a healthy dividend, so you decided you would add to your position. The current stock price is $15.00 and you purchased another 100 shares which cost you $1500.00. To determine what the new book value would be, add the total amounts invested from both trades. Your new book value of the 200 shares is $2500.00.

The book value is very important to know in the case of a sale. This amount will assist you in calculating your capital gain or loss. I will explain this calculation in a later blog post.