ShmoopTube

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finance a la shmoop. what's the difference between market value and book

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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

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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.

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