What Is Book Value Of Stock?

To some extent, book value is used in evaluating the reasonableness of the market price of a stock. However, it must be used with cautions. The fact that a stock is selling at less than book value does not necessarily indicate a bargain. Book value is a historical concept representing the amounts invested by stock holders plus the amounts earned an retained by the corporation.

IF a stock is setting at a price above book value, investors believe that management has created a business worth more than the historical cost of the resources and entrusted to its care. This, in essence, is the sign of a successful corporation if the excess of market price over book value becomes great, however, investors should consider whether the company's prospects really justify a market price so much above the underlying book value of the company's resources.

On the other hand if the market price of a stock is less than book value, investors believe that the company's resources are worth less than their cost while under the control of current management. Thus the relation ship between the book value and market price is one measure of investor's confidence in a company's management.

One such example is that shortly after the introduction of its window Microsoft software the common stock of Microsoft rose to a market value of more than 100 $ per share, although its book value per share was only 6.5 $ investors believed the Microsoft product and its management.