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Finance: What is the Difference Between Market Value and Book Value? 42060 Views
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Description:
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
Full Transcript
- 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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