FAIR VALUE, FACE VALUE, NOMINAL VALUE, MARKET VALUE, REAL VALUE, BOOK VALUE

Confused with several terms

These are some terms often used in Accounting and Finance. Many really understand the difference or simply get confused between the jargons. So, this is a little article trying to uncomplicated and give you a better understanding of the terms.

Face Value/ Nominal Value/ Par Value

Face value is the price of the security at the time of its Issue.  It doesn’t change over the time.  And guess what? Nominal Value and Par Value are just another name for it

Market Value

It is the price listed in the exchange or the price at which it is traded in Market

Book Value

It is the price calculated by the company and recorded in their books. They deduct all debt and arrive at a price or value. For shares it is calculated as: (Total Shareholders’ Equity – Preference Shares)/Number of Outstanding Shares

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In terms of Assets, Book value is what investors look at to know how much a company is worth if it ceased its operation today. All the tangible assets – Debt gives you Book Value. More the value better the position of the company.

Fair Value

It is rightly valuing or estimating the price of an asset or share or services. It is used by the investors to get a clear picture of prices which may otherwise be overpriced or under-priced by the market. A company calculates its fair value annually and in case of takeovers or mergers shares/assets are bought at the fair value. It is individually calculated based on various factors such as demand-supply, risk factors, returns, actual utility, etc

Bond fair value is formula based to calculate the present value of future cashflows.

Real Value

Real value is when the price is corrected for the inflation rate.

I hope this article helped you.

-D.V.P

How Stock Index and its daily percentage changes are calculated

The stock market fluctuates daily. Someday it rises high and someday reaches rock bottom.  There are several stock indexes across the globe i.e. S&P 500, Dow Jones, Nikkei 225, Sensex, Nifty, etc.

These indexes are the statistical weighted average of few major companies listed under them. Sensex is calculated based on 30 companies and Nifty on 50 companies. It will be easier to understand with an example.

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Assume the calculation for an Index called ABC ( I will take very small fictional numbers so that there is no confusion)

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ABC takes into consideration 3 companies ( just for simple calculation).  These companies are available for trading. FREE-FLOAT MARKET CAPITALISATION METHOD IS USED TO CALCULATE INDEX.  It is simply multiplying the number of shares available to public with the current market price of the share.

Eg: XYZ company with 2000 shares, out of which only 1500 shares available for public trade at market price Rs. 120/- per share

=1500*120= Rs.180,000 Free Float Market capitalisation

MNO  company with 3000 shares, out of which only 2000 shares available for public trade at market price Rs. 500/- per share

=2000*500= Rs.1000,000 Free Float Market capitalisation

PQR company with 1000 shares, out of which only 800 shares available for public trade at market price Rs. 200/- per share

=800*200= Rs.160,000 Free Float Market capitalisation

So, total Free Float Market Capitalisation = 180,000+1000,000+160,000=1,340,000

Now, the year ABC INDEX had begun or the BASE YEAR it would have the initial Market Cap value like the one we calculated now. (eg: Sensex’s base year is 1978-79)

So now we take 2 assumptions about base year and its Market Cap

1. Base year: 2000-01
2. 2.       Market Cap: Rs.200,000

The base year Market Cap is considered 100. So daily or within every few minutes how much the Market Cap has increased or decreased to that base year is calculated

Calculation of ABC INDEX: 1,340,000* 100/200,000= 670 points

Tomorrow if the share prices of companies change and the Free Float Market Cap changes from Rs.1,340,000 to Rs.1,335,000 then how the changes are shown?

Calculation: 1,335,000* 100/200,000= 667.5 points

The Stock Market Index has gone down from 670 points to 667.5 points, i.e. the market is down by 2.5 points

Percentage Decrease = 2.5/670*100 = 0.37%

So, that’s how you get the news: The Market Today is at 667.5 points, down by 2.5 points or 0.37%.

Please do give me your feedback about the article and if you have any more doubts you want to be clear on. Thankyou.

DVP

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Why Companies strive to perform higher to maintain high Market share price even when they receive money only once through IPO?

Shareholders are the owners of the company no matter in what minuscule amount. They provide the money to the company when the company needed it. And that is the reason the company pays dividends to its shareholders out of its profit. Now shares are not only held by public but also the promoters and management. As the shares are traded in the market the price certainly vary but the company retains its own value in the books of accounts and not the market price. The dividend paid is also on its Face Value and not the market price. As the company performs good, the market demand for its share increases and so is the reputation and goodwill of the company. The Management holds the majority shares, so  if the market share price is going rocket high because of its performance imagine how much the management themselves are profiting by holding these shares! I hope you understood.

Further Question asked on it: .but the shares that are held by any shareholder has only a virtual value until it gets exchanged for money…..so my question now is that why does the market price of the share fall even when a company provides its best performance (topping the industry) but could not meet the projections of market analysts who may or may not have a clue of whats happening in the company?

That’s mostly depended on the Demand and Supply factors of the shares resulting mostly from the speculations. When company performs good but do not meet the projections, speculators assume the company’s price will fall and it may be not a good idea to hold it.. so as the number of sellers increase than the demand… the stock prices fall. But if its a fundamentally strong company, it need not worry. Long term investors and the company’s management, peformance and growth opportunities always make it a valuable share in the market