Three methods to value stocks: which one to choose based on your investment strategy

When you decide to buy a stock, you face a fundamental question: what is it really worth? The answer is not unique. There are three different approaches to determine the nominal value, book value, and market value of a stock, and each will reveal different information about the company you are investing in.

How each type of value is calculated

The starting point: nominal value

The nominal value is the easiest to calculate. You take the company’s share capital and divide it by the total number of shares issued. Although simple, this method has limited usefulness in the equity market.

Practical example: A company called BUBETA S.A. has a share capital of €6,500,000 and has issued 500,000 shares. The nominal value per share would be €13.

This value represents only the starting point of the issuance. Its relevance diminishes over time, so experienced investors mainly consult it in specific contexts such as convertible bonds, where a predetermined conversion price is established.

The perspective of the balance sheet: book value

The book value or net book value offers a deeper insight. It is obtained by subtracting liabilities from assets and dividing the result by the number of shares issued.

Example: MOYOTO S.A. has assets worth €7,500,000, liabilities of €2,410,000, and 580,000 shares issued. The resulting net book value is €8.775 per share.

This method is especially relevant for investors practicing value investing, a style where the maxim is “buy good companies at a good price.” These managers seek to identify companies with solid balance sheets whose market price is below what their accounting suggests they should be worth.

The reality of the market: market value

Market value is simply the price at which shares are traded on the stock exchange. It is calculated by dividing the market capitalization by the number of shares outstanding.

Example: OCSOB S.A. has a market capitalization of €6.940 billion and 3,020,000 shares issued. Its market value is €2.298 per share.

This is the price you see on your trading screen, the result of the confrontation between buy and sell orders. Unlike the previous ones, market value reflects expectations, news, and sentiment of all participants at that moment.

What each type of value tells you about a stock

The nominal value has little interpretation: it simply marks the start. In contrast, the book value allows you to assess whether a company is undervalued or overvalued relative to its net worth. By comparing both using the Price/Book Value ratio (P/VC), you can identify opportunities among similar companies.

Market value, on the other hand, does not tell you whether the price is expensive or cheap. It only shows what “is” at this moment. To determine if it is attractive, you need to apply other indicators such as the PER, analyze EPS, or perform a detailed fundamental analysis.

How to use each method in your trading

Nominal value: limited use but present

Although its direct application in trading is minimal, the nominal value reappears in instruments such as convertible bonds. In the May 2021 issuance of IAG convertible bonds, for example, the conversion price was set as a percentage of the average stock price over a certain period. In these cases, it establishes a known reference point in advance.

Book value: a tool for selective investors

If you apply a selective buying strategy, the book value is your ally. Imagine you want to invest in a gas company in the IBEX 35. Comparing the P/VC of ENAGÁS versus NATURGY, you might observe that ENAGÁS trades at a lower ratio. This suggests it is cheaper in terms of book value, which could make it more attractive under this criterion.

However, remember that a single ratio never tells the whole story. You should consider multiple factors together before making a decision.

Market value: your daily operational compass

It is what you constantly see on your trading platform. If you buy META PLATFORMS at $113.02 and believe it will fall further, you can set a limit buy order at $109.00. The order will only execute if the market hits that level.

Keep in mind trading hours: European markets operate from 09:00 to 17:30 (Spanish time), US from 15:30 to 22:00, Japan from 02:00 to 08:00, and China from 03:30 to 09:30. Outside these hours, you can only place pre-set orders.

Limitations you should be aware of

The nominal value quickly loses relevance after issuance. It is the most outdated metric and offers little to trading operations.

The book value performs poorly with small companies or those heavy in intangible assets (such as tech companies). Additionally, creative accounting can distort this value, although it is not common.

Market value suffers from indeterminacy. It is influenced by external factors that have little to do with the company: changes in monetary policy, sector-related significant events, general economic deterioration, or simply speculative euphoria without foundation. Sometimes the market overcounts information, other times it underestimates it.

Quick comparative table

Conclusion: the importance of context

There is no absolute winner among these three methods. Each answers a different question. Nominal value is historical, book value is analytical, and market value is pragmatic.

The key is to use them in the correct context. A P/VC ratio only makes sense if you complement it with other company details. Investing requires multiple perspectives, not a single metric.

Your success as an investor will depend on wisely combining these three approaches, adapting them to your personal strategy, and always recognizing what each tells you before acting.