Some terminologies worth noting: Par Value, Book Value, Market Value
I know nobody likes the technical stuff specially in investing but one has to familiarize oneself to understand the business lingo, remember one must increase their financial I.Q. because information gives one an edge when it comes to investing. So First lets define these terms(some I will barrow from somewhere else to be clear).
Par Value: The nominal monetary amount assigned to a security by the issuer.
Simply put it is the peso amount that is setup by the company for their shares of stock. For example Company X is incorporated and that the shares of stock are assigned a par value of Php 1.00 per stock. Some companies has a no-par value stock. Having a par value helps the company have an exact measure of their capitalization because such things must be recorded. In some instances when the stock is first issued by the company a stockholder may invest more than the setup par value which results into a over-payment. In practice this is not recorded as gain but rather it is an additional capital recorded as additional paid in capital.
Ok ok I know it’s to technical. The question now is that why do you as an investor need to know what is PAR Value. Well as I said it is a measure. It will be a good reference when buying stock. Probably you will notice the importance of this term when you compare Par Value and Market Value for example take PLDT Stock(listed as TEL, go to www.pse.com.ph and type TEL in the Right top search named Symbol Lookup). When PLDT Stocks were first issued it was at Php 5.00 only but as of last Friday the Market value is at Php 2, 445.00. Now do you see what I mean.
Book Value: It is the current value of a stock as per company’s books.
Ok let me put it this way, it is the net worth of the company per stock. Well what’s the use of this value anyways you may ask. As I have discussed in my previous post it is important to note what a company’s net worth is. Net worth implies that the company is either a company in good financial position or not. A negative net worth is called a deficit and when we say deficit it means the business owes more than owns more. The likelihood of that company going bankrupt is high thus one has to be on the look out. It also helps investors to determine if such stock is undervalued as compared to its current market price. For example stock of Company X has a market value of Php 25.00 but its book value is at Php 45.00. What does this mean? It simply means that the market sees a different value for the company and it is a indication for an investor to further analyze why such is happening given the strong standing of the stock.
Simply said it is how anyone will buy the stock based on their perceived value of the stock. Let me give you an example. Back in my province some businessmen goes around the neighborhood and check the mango trees in our backyard. If they see that it has a lot of buds they predict that this tree will bear many mangoes in the near future and will ask the owner if they can “pakyaw” (not Manny Pacquiao) our tree. Price negotiations will run and soon an agreed price will be settled. The basis of such price is the current price of mango any sane person would ask or buy such product. Nobody will buy a mango for Php 20,000.00 per kilo but rather it would be in a range of Php 40-120 per kilo range depending on the demand and supply level.
Market price is the price at which stocks are bought and sold. In the case of the Market price indicated in the PSE it is the last traded price which is called closing price. This is important because as I said it will be the basis of any sane investor. In the stock market, brokers will have their bid and ask values. As the course of trading happens this value changes depending who is willing to sell or buy at a certain price.