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What's the difference between market value and book value?

Assuming we are talking about an investment, market value is what an investment is currently worth in the market. If the stock of ABC company is currently trading at $50 a share, its market value is $50.

What you paid for a share of that company is its book value. If you bought a share a year ago for $40, the price you paid -- $40 -- is its book value. Market value and book value are often different amounts. Book value comes into play if you hold investments that count as foreign content in your RRSP. The maximum amount that can be foreign content, in most cases, is 30% of your RRSP's book value. This 30% limit is calculated on the original cost or book value, as opposed to the current market value. Book value has another meaning, relating to a company.

Book value is the cash value of a business which, after all debts are paid, belongs to the owners of a company, or the shareholders, if the company is liquidated. This is calculated by looking at the balance sheet and subtracting the company's liabilities and value of preferred shares from its assets, and then dividing what is left by the total number of common shares outstanding. A company's book value can be misleading because the numbers used to calculate it can be unrealistic. Why is this? Assets include, as stated on the balance sheet, such things as inventory, buildings, land and cash in the bank. But the values listed for these assets are historical accounting figures. Let's say the company owns a 30-year-old building in downtown Vancouver. That building may have been depreciated for tax purposes so that it's now carried on the company's books at $100,000. Yet it may in fact be worth millions of dollars. So the book value understates the sell-off value of the company.

Asset value could be overstated, too, of course. A company might own three-year-old computer equipment that is worth nothing because faster and better equipment has made it obsolete. It might be shown on the books as being worth $50,000 because it hasn't yet been fully depreciated. This would overstate the firm's sell-off value. Book value is often lower than the current market value of a firm's shares because it's based on historical accounting figures. Some analysts compare these figures and believe that if the ratio of market value to book value is low, it may be a good buy.