Why distinguish between nominal value, book value, and market value: a guide for investors

When analyzing a stock, we encounter three different price references that can cause confusion: nominal value, book value, and market value. Although they may seem interchangeable concepts, each offers different perspectives on the same asset and is calculated in radically different ways. Understanding their differences is essential for applying informed investment strategies.

The sources: where each value extracts its information from

Each valuation method is fed entirely different data, which determines what information it will reveal and when it will be useful to apply.

The nominal value arises from a simple arithmetic operation: dividing the company’s share capital by the total number of shares issued. If a company has a capital of €6,500,000 and has issued 500,000 shares to the market, the nominal value will be €13 per share. This figure represents the financial starting point of each security.

The book value or accounting value requires a more complex calculation. It is obtained by subtracting liabilities from assets and dividing the result by the number of shares issued. Suppose MOYOTO S.A. has assets worth €7,500,000, liabilities of €2,410,000, and 580,000 shares. The book value would be €8.775. This indicator reflects what each share would theoretically be worth if we liquidated the company according to its accounting records.

The market value is the actual price at which the stock is traded. To calculate it, divide the market capitalization by the number of shares outstanding. If OCSOB S.A. has a market capitalization of €6.940 billion and 3,020,000 shares issued, its market value would be €2.298. Here, accounting figures do not matter: what matters is what buyers and sellers are willing to pay at this moment.

What each value really tells us

Beyond the formulas, these three values convey different messages about the quality and price of a stock.

The nominal value communicates little to modern shareholders. It serves as a historical reference of the security’s origin but has limited application in (stocks) unlike bonds. Its importance mainly emerges in instruments like convertible bonds, where a predetermined conversion price is set based on a specific formula.

The book value is especially revealing for those practicing value investing, the strategy popularized by Warren Buffett that seeks to “buy good companies at a good price.” This method allows identifying whether a stock is undervalued relative to its net assets. However, it has serious limitations: it is inefficient for valuing tech companies and small caps whose value resides in intangible assets, and it can be distorted by creative accounting practices.

The market value is what truly matters when operating. Unlike the book value (which says “what it should be”), the market price says “what it is at this very moment.” However, this value does not reveal whether the price is high or low; for that, we need additional ratios like PER or P/VC, combined with solid fundamental analysis.

How to apply each value in real decisions

For the nominal value: Its practical use is minimal in common stocks. It only becomes relevant in special situations like the conversion of convertible bonds, where a predefined exchange price is set.

For the book value: This is where its true utility emerges. The P/VC ratio (Price/Book Value) allows for quick comparison of companies within the same sector. Let’s take two gas companies in the IBEX 35: if ENAGAS trades with a P/VC of 0.80 and NATURGY with 0.95, the first is cheaper relative to its book value. This comparison helps preselect candidates, although it should never be the sole criterion: other ratios and strategic factors also matter.

For the market value: It is your daily operational compass. When you access your trading platform, you see the real-time price resulting from the crossing of buy and sell orders. If you plan to buy META PLATFORMS and the current price is $113.02, you can set a limit buy order at $109.00 to execute automatically if it falls. Keep in mind trading hours: European markets operate from 09:00 to 17:30 (Spanish time), US from 15:30 to 22:00, Japan from 02:00 to 08:00, and China from 03:30 to 09:30.

The limitations of each approach

No method is perfect. The nominal value is obsolete for current equity analysis; its interpretative scope is too limited.

The book value fails when companies hold significant intangible assets (brand, technology, know-how) that are not properly reflected on the balance sheet. Small companies and tech firms are especially problematic. Additionally, creative accounting can introduce distortions that make the book value inaccurate.

The market value suffers from extreme indeterminacy. Factors unrelated to the company’s reality continually impact it: changes in monetary policy, sector news, deterioration of macroeconomic prospects, or simply speculative euphoria can deviate it from fundamentals. The market often overinterprets or underestimates data, distorting the true financial reality.

Comparative summary

Conclusion: context is everything

Investment requires a holistic view. The common mistake is to cling to a single ratio or value without considering the full picture. The nominal value is practically absent from modern stock analysis. The book value is valuable for detecting value opportunities but is insufficient on its own. The market value is your daily operational reference but must be interpreted within the context of additional ratios and underlying business analysis.

The key is to use all three indicators as an integrated system: validate potential undervaluation with the book value, confirm with multiple ratios, and finally execute based on the market price. Only then will you make truly informed decisions in your investments.