How to understand nominal, book, and market value: The guide every investor needs

When we start in the world of investments, one of the biggest confusions arises when we face three concepts that seem interchangeable but are fundamentally different: the nominal value, the book value, and the market value of a stock. Are they the same? When should each be used? Why does the price we pay on the stock exchange sometimes not match what the company’s balance sheet states?

In this guide, we will explain the key differences among these three valuation models, how they are calculated, when to apply them, and most importantly, what limitations each has so you don’t make costly mistakes in your investment decisions.

The three ways to value a stock: Where do the numbers come from?

The foundation of any investment analysis lies in understanding where the data comes from. Gathering information from an accounting document is not the same as observing real-time market transactions.

The nominal value: the starting point

The nominal value is, essentially, the initial theoretical price of a stock at the time of issuance. It is obtained by dividing the company’s share capital by the total number of shares issued. Although it may seem simple, it is crucial to understand it as a historical reference rather than an analysis tool.

Let’s take a practical example: if a company has a share capital of €6,500,000 and issues 500,000 shares at its IPO, the nominal value is calculated by dividing both figures: €6,500,000 ÷ 500,000 = €13 per share.

This number, although little used in modern equities, remains relevant in instruments like convertible bonds, where a predetermined conversion price is established based on a specific formula that acts as a contractual reference.

The book value: what the balance sheet says

Here we enter more practical territory. The (book value) or net book value represents what each share is theoretically worth according to the company’s accounting books. It is calculated by subtracting liabilities from assets and dividing the result by the total number of shares.

Imagine a company with assets worth €7,500,000, liabilities of €2,410,000, and 580,000 shares issued. The calculation would be: (€7,500,000 - €2,410,000) ÷ 580,000 = €8.775 per share.

This value forms the basis of what is called value investing, the strategy popularized by Warren Buffett. The central idea is simple: identify companies whose book value is solid but whose market price is below what they “should” be worth according to their accounting.

The market value: the actual price you pay

Finally, the market value is the price at which you actually buy or sell a stock in the market. It is obtained by dividing the company’s market capitalization by its outstanding shares. If a company has a market cap of €6.94 billion and 3,020,000 shares outstanding, the price per share would be: €6,940,000,000 ÷ 3,020,000 = €2.298.

But here’s the interesting part: this price reflects not only the company’s financial reality but also future expectations, market sentiment, and many external factors.

What does each value mean and what does it reveal?

Knowing how they are calculated is one thing; understanding what they tell us is entirely different.

The nominal value only speaks to the origin. It’s like knowing at what price a house was sold 30 years ago: historical, but of little use for current decisions. In fixed income, it carries more weight because bonds have maturity dates and align with the nominal at maturity. In stocks, its relevance is marginal.

The book value, on the other hand, is a mirror of the company’s actual financial state. When we compare the market price with the book value (using the P/B ratio), we can detect if a company is undervalued or overvalued. For example, if we look at two energy sector companies like ENAGAS and NATURGY, both listed on the IBEX 35, a lower P/B in ENAGAS would suggest it is more economical relative to its book value.

However, this method has critical limitations: it performs poorly with tech companies and small caps (companies with many intangible assets), and can be distorted by accounting tricks or creative accounting.

The market value is what you see every day on your screen. It is the pure result of the meeting between buyers and sellers. It does not tell you if it is expensive or cheap, only what the price is. To determine if it is expensive, you will need other indicators like the PER, dividend yield, or a solid fundamental analysis.

When to apply each method: real-world use cases

Nominal value: very specific cases

The nominal value is mainly applicable in convertible bonds. These instruments offer periodic interest payments and, at maturity, convert the investment into new shares at a predetermined price. That conversion price acts as a “functional” nominal value, although calculated through more complex formulas. For example, it may be based on the average share price over a specific period, as was the case with convertible issues by aerospace companies.

Book value: the tool for the patient investor

If you practice value investing, the book value is your ally. Your strategy will be:

1. Identify companies with solid balance sheets and robust business models
2. Reject those trading at excessive prices, even if they are good companies
3. Reject those with attractive prices but questionable balance sheets
4. Buy only when you find good balance + attractive price

When you need to choose among several options in a sector, the P/B (Price/Book Value) provides a quick comparison. A low P/B suggests the market is valuing the company below its book value, which could indicate an opportunity, provided the business model is viable.

Market value: your operational tool

The price you see on the stock exchange is your daily reference. It is especially crucial if you operate with limit orders. When you wait for a stock to fall further before buying, you set a buy order with a price limit. If the market reaches that price, your order is automatically executed.

It is important to remember trading hours according to your time zone:

• European exchanges: 09:00 to 17:30
• U.S. market: 15:30 to 22:00
• Tokyo Stock Exchange: 02:00 to 08:00
• Chinese market: 03:30 to 09:30

Outside these hours, you can only place pending orders that will execute if the price allows in the next session.

The limitations you should not ignore

Each method has weaknesses you need to be aware of:

Nominal value: It is practically obsolete in the stock market. Its interpretation is very brief (only relevant in issuance) and adds little value to your daily operations.

Book value: It becomes ineffective with capital-intensive companies with many intangible assets. Tech startups, for example, can have enormous intangible assets (brand, intellectual property) that are not properly reflected in the balance sheet. Additionally, creative accounting (discretionary accounting adjustments) can distort this value, although it is rare in serious listed companies.

Market value: It is deeply influenced by factors that have little to do with the company itself. A change in interest rate policies can depress stocks without anything changing in the company. News about a competitor, macroeconomic shifts, or sector euphoria can cause the price to rise or fall irrationally. The market tends to overinterpret positive data during booms and exaggerate concerns during crises.

Comparative summary: your quick reference

Conclusion: interpretation is everything

Investing is not just memorizing formulas. The real skill lies in knowing when to use each tool and in what context. Obsessively focusing on the P/B ratio is pointless if you ignore other fundamental factors of the company. Nor can you rely solely on the market value without checking if that price makes sense based on fundamentals.

The ideal approach is to use these three values complementarily: the nominal value as a historical reference, the book value to spot undervalued opportunities, and the market value as your actual entry point into the market. Only then will you build sustainable investments based on data, not intuition.