What is the book value of the common share?
Book value per common share (or simply book value per share - BVPS) is a method of calculating the book value per share of a company based on the equity of the common shareholders in the company. A company's book value is the difference between that company's total assets and total liabilities, not its market share price.
In the event of the dissolution of the company, the book value of each ordinary share indicates the remaining dollar value of the ordinary shareholders after all assets are liquidated and all debtors are paid.
Understand the book value
The equation for the book value of a common share is:
Book value per ordinary share (formula below) is an accounting measure based on historical transactions:
What does BVPS tell you?
The book value of ordinary shares in the numerator reflects the original returns that the company receives from the issuance of ordinary shares, which are increased by profits or decreased due to losses, and decreased by dividends paid. Company share buybacks reduce the book value and the total number of common shares. Stock buybacks occur at current stock prices, which can lead to a significant reduction in the company's book value per common stock. The number of common shares used in the denominator is usually the average number of diluted ordinary shares of the past year, which takes into account any additional shares other than the number of underlying shares that could arise from stock options, guarantees, preferred shares, and other convertible instruments.
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Example of BVPS
As a hypothetical example, suppose XYZ Manufacturing's common stock balance is $ 10 million, and one million shares of common stock outstanding, which means that BVPS is ($ 10 million / 1 million shares), or $ 10 per share. If XYZ manages to generate higher profits and uses those profits to buy more assets or reduce liabilities, the company's common stock increases. For example, if a company makes a profit of $ 500,000 and uses $ 200,000 of the profits to purchase the assets, the common stock increases along with the BVPS. On the other hand, if XYZ uses $ 300,000 in dividends to reduce liabilities, the common stock also increases.
The difference between the market value of the share and the book value of the share
The market value per share is the company's current share price, and it reflects the value that market participants are willing to pay for their regular share. Book value per share is calculated using historical costs, but market value per share is a forward-looking measure that takes into account the firm's future earnings strength. With increases in the company's estimated profitability, projected growth, and soundness of its business, the market value per share grows higher. Material differences arise between the book value per share and the market value per share due to the ways in which accounting principles classify certain transactions.
For example, consider a company's brand value, which was created through a series of marketing campaigns. US Generally Accepted Accounting Principles (GAAP) require marketing costs to be spent promptly, which reduces the book value per share.1 However, if the advertising efforts enhance the company's product image, the company can charge premium rates and create brand value. Market demand may lead to an increase in the share price, which creates a large discrepancy between the market and the book values per share.
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The difference between book value of common stock and net asset value (NAV)
Whereas, BVPS considers the residual equity per share of the company's shares, net asset value, or NAV, to be the value per share computed for a mutual fund, exchange-traded fund, or ETF. For any of these investments, the net asset value is calculated by dividing the total value of all fund securities by the total number of fund shares outstanding. NAV is created daily for mutual funds. A number of analysts consider total annual return to be a better and more accurate measure of mutual fund performance, but net asset value is still used as an easy-to-use interim valuation tool.
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Because the book value per share only takes into account book value, it fails to incorporate other intangible factors that may increase the market value of the company's shares, even upon liquidation. For example, high-tech banks or software companies often have very little tangible assets in relation to their intellectual property and human capital (workforce). These intangible assets will not always be taken into account in the book value calculation.
Discuss about stock market investments, upcoming IPOs, stock performance and how to invest in stocks
IPO, is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it's known as an IPO.
Why do the company go public?
The existing private shareholder might want to make an "exit" and sell their shareholders to public.
The company might want to make an expansion or an acquisition or to have some more money in the bank
Both the combination of the above point.
Most financial advisors with any competency whatsoever will caution against improper use of credit cards. However, they do have benefits that can be worthwhile. Provided you have the resources to ensure monthly payoff, just the frequent flyer points or other benefits make their use worthwhile. But they also aid in cashflow and convenience.
We need good credit card advice to make your shopping smart.
All the discussions and options for NRI investments in India. Also discuss NRI Taxation.
Margin trading makes it easier for traders to enter into trading opportunities as you don't have to worry about spending a lot of cash to acquire an asset.
Margin is the interest owed on loans between you and your broker in relation to the assets of your portfolio. For example, if you short sell shares, you must first borrow it on margin and then sell it to the buyer. Or, if you buy on margin, you will be offered the ability to leverage your money to buy more shares than the cash you spend.
For example, with a margin of 10%, you can buy up to $ 1,000 worth of shares with only $ 100 subtracting. You are given an additional $ 900 in the form of a marginal loan, on which you will have to pay interest. If you have a margin account, it is important that you understand how this margin interest is calculated and be able to calculate it yourself manually when needed. It is just as important as the interest on your savings account.
Before making a calculation, you must first know the margin interest rate your broker charges for borrowing money. The mediator should be able to answer this question. Alternatively, the company's website may be a valuable source for this information, as well as account confirmation and / or monthly and quarterly account statements.
Usually the broker will list their margin rates alongside other disclosures of fees and costs. Often times, the margin interest rate depends on the number of assets you have with your broker, the more money you have with them, the lower the margin interest you are responsible for paying.
Margin interest calculation
Once you know the margin interest rate being charged, grab a pencil, piece of paper, and calculator and you'll be ready to find out the total cost of the margin interest payable. Here's a hypothetical example:
Let's say you want to borrow $ 30,000 to buy a stock that you intend to hold for 10 days where the interest margin is 6% per annum.
In order to calculate the cost of borrowing, first, take the amount of money borrowed and multiply it by the rate charged:
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$ 30,000 x .06 (6%) = $ 1,800
Then take the resulting number and divide it by the number of days of the year. Typically, the brokerage industry uses 360 days, not the anticipated 365 days.
$ 1,800 / $ 360 = 5
Next, multiply that number by the total number of days you've borrowed, or expect to borrow money on margin:
5 x 10 = $ 50
Using this example, it would cost you $ 50 in margin interest to borrow $ 30,000 for 10 days.
While margin can be used to amplify profits in the event that the stock rises and a leveraged purchase is made, losses can also be amplified if the price of your investment falls, resulting in a margin call, or the need to add more cash to your account to cover those paper losses.
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Remember that whether you win or lose on a trade, you still owe the same margin interest that was charged in the original transaction.
The bottom line
Margin trading is a risky business, but it can be profitable if managed properly and, most importantly, if the trader does not get over himself. It also makes accessing specific asset values easier as the trader does not need to pay the total cost of the asset when he sees an interesting trading opportunity. When entering into a margin trade, it is important to calculate the cost of borrowing in order to determine the true cost of the deal, which will accurately indicate profit or loss.
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All about investments and personal finance in India.
For people who wish to diversify beyond stocks and mutual funds there are options in alternative asset which can provide high returns with less correlation to market such as international real estate, Invoice discounting, Crypto Interest account etc.
@Harleen Hi, thanks to clarify how to activate a dormant and inoperative account. On of my accounts got inactive and I was looking for ways to activate it now. Actually, that was a prior salary account of my previous job that I forgot to close and it became inactive since no transactions were done. And, I got a new account opened for salary from new company. Thanks for sharing such useful information!
General Queries not covered in any of the above topics.
Spending habits greatly affect whether you will become rich or increasingly poor. Over the past 5 years, I've maintained these good spending habits and it really helped me save a lot.
I buy things I need instead of I want. Before I go shopping, I'll make a list of things to buy and point to places where the item is sold. This helps me limit unnecessary purchases and save time on shopping
I record what I spend as detailed as possible so that by the end of the month, I can adjust my spending for the next month.
I always set a fixed budget each month and try to target within the budget set earlier
(I use the financial management app Misa Money Keeper to maintain these 3 habits. You can refer to this app. App has many features, easy to use. The free version has all the basic features. Those who need more features can upgrade to the Premium version for only 3.99$/year)
Every month, I will make a spending plan to avoid indiscriminate spending
Before buying something, I usually check the prices and compare prices at different places to buy the best prices.
I often buy promotional goods, especially on the big sale occasion of the year. It saved me a fair amount of money to spend on other things.
How do you save money? Share it with everyone !!!
@Karthik123455 I think these days, building an online business seems a great idea. Earlier I believed having local business will help. But, now I changed my thought process. In this virtually connected digital world having online business is much better.
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