Three ways to value a stock: understanding the nominal, book, and market value

When we talk about investing in stocks, we encounter three key concepts that define how an asset is valued: nominal value, book value, and market value. Although many investors operate solely by observing the on-screen price, understanding these three perspectives is essential to identify opportunities and avoid hasty decisions. In this guide, we break down each of these values, explain when to apply them, and discuss their real limitations.

How each type of value is calculated

The starting point to differentiate these three valuations lies in the data we use to obtain them.

The nominal value of a share is based on a simple calculation: we divide the company’s share capital by the total number of shares issued. Let’s take a practical example: if BUBETA S.A. has a share capital of €6,500,000 and has issued 500,000 shares, the nominal value per share will be €13. This figure represents the theoretical initial issuance price.

The book value, also called net asset value or carrying value, requires subtracting liabilities from total assets and dividing the result by the number of shares issued. Imagine MOYOTO S.A. with assets of €7,500,000, liabilities of €2,410,000, and 580,000 shares issued. The calculation gives us: ((7,500,000 - 2,410,000) / 580,000 = €8.78 per share. This value reflects the portion of net equity theoretically attributable to each shareholder.

Market value is what we observe in real-time on our trading platforms. It is obtained by dividing the market capitalization by the number of shares. If OCSOB S.A. has a market cap of €6.94 billion and 3,020,000 shares issued, its market value will be approximately €2.298. This is simply the price resulting from the intersection of buy and sell orders.

What each value truly reveals about an investment

Beyond mathematical formulas, each valuation type communicates different information about the company and its shares.

The nominal value marks the starting point. In equities, it has little prominence because shares do not have a predetermined maturity. Its real importance appears in convertible bonds, where a fixed conversion price is established as a reference for future transactions. When IAG issued convertible bonds in May 2021, that nominal reference value determined at what price they could be exchanged for shares.

The book value is especially valuable if we want to assess a company’s true financial health. Comparing net equity with the market price allows us to identify if a company is undervalued or overvalued from an accounting perspective. Value investors, following the philosophy of “buy good companies at a good price,” use this value as a central reference. However, it shows significant inefficiencies when valuing tech companies and small caps, where intangible assets )patents, brand, software( are poorly reflected on the balance sheet.

Market value is what we actually operate with. Unlike the book value, which responds to “what it should be,” the market price tells us “what it is.” It discounts all intrinsic and extrinsic factors: growth expectations, regulatory changes, sector sentiment, economic cycles. That’s why the price does not indicate whether it is expensive or cheap; such an assessment requires additional indicators like the PER, profitability ratios, and deep fundamental analysis.

When and how to apply each valuation in your investments

Uses of nominal value in practice

Nominal value has limited application in daily stock trading but remains relevant in certain contexts. It actively appears in convertible bond issues, where it sets the future conversion price. Although not calculated exactly with the traditional formula, it acts as a binding reference known in advance.

Uses of book value: the tool for value investors

Book value is central to the strategy of those seeking companies with solid balance sheets at reasonable prices. The logic is clear: a) If the balance sheet is strong but the price is excessive, do not invest. b) If the price is attractive but the balance sheet raises doubts, also avoid. c) If the balance sheet is solid and the price is below what accounting would suggest, then yes.

A practical example: let’s compare two gas companies in the IBEX 35 using the Price/Book ratio )P/VC(. If Enagas trades with a P/VC less than Naturgy, it means it is cheaper in terms of book value, making it a more interesting candidate for value investors. But this is just an initial filter; other factors like income quality, debt levels, and sector outlooks must confirm it.

Uses of market value: operating in real time

The price we see on screen is our main operational tool. During trading hours )09:00-17:30 in Europe, 15:30-22:00 in the US, 02:00-08:00 in Japan(, the price fluctuates according to buy and sell orders. Outside those hours, we can only place limit orders that will execute if the market cooperates.

For example: if META PLATFORMS drops to $113.02 at close and we expect further weakness, we can set a limit buy order at $109.00. The order will only execute if the actual price hits that level. Market value is the compass for defining entry points, exits, take-profits, and risk management.

The real limitations of each method

The nominal value: its main weakness is being practically obsolete in equities. It is limited to the moment of issuance and adds little to modern trading operations.

The book value: problematic with small and tech companies where intangible assets dominate. Additionally, companies can apply “creative accounting” that distorts net asset value. A balance sheet that looks healthy on paper may hide different financial realities.

Market value: its greatest vulnerability is indeterminacy. It is constantly influenced by factors that have little to do with the company: central bank monetary policy decisions, sector-related news, macroeconomic expectation changes, even speculative euphoria without foundation. A stock can irrationally revalue simply due to sector fashion, completely distorting its financial reality.

Quick reference table

Conclusion: integrate all three values into your strategy

There is no single “correct” value: there is the appropriate value for each context. A value investor needs to understand the book value but also recognize its limits. An intraday trader operates directly on the market value, keeping in mind that this price can disconnect from fundamental reality.

The key is not to rely solely on one ratio or perspective. Nominal value sets the initial reference, the book value shows the company’s true financial health, and the market value connects us with the operational reality at the moment. Integrating these three perspectives is what separates occasional investors from those who make truly informed decisions. The key lies in interpreting each value while respecting its specific purpose and inherent limitations.