Market Value

Categories: Company Valuation

See: Market Capitalization. See: Equity Capitalization.

The market value of pretty much anythiing...is whatever someone is willing to pay for it now-ish.

The stock market runs along, with prices changing by the moment. Comfortingly, the total shares outstanding for most companies change at a much slower pace. So if whatever.com has 50 million shares outstanding and its stock is trading for 40 bucks a share, then the Street is saying that the Market value of that company is $40 x 50 million, or $2 billion.

Think about it from the perspective of a home owner who spent $1 million building her amazing treehouse home. The best offer from anyone willing to buy it? 300 grand. That's the market value of the home, despite what Zillow says it should sell for.

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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]

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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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Find other enlightening terms in Shmoop Finance Genius Bar(f)