Three key valuations that every investor should differentiate in the stock market

When we face a stock market action, we encounter a fundamental dilemma: what is the true value of that stock? The answer is not unique. In fact, there are three completely different ways to calculate it, and each reveals different information about whether we are facing an investment opportunity or a potential trap.

The starting point: what is the nominal value of a stock?

The nominal value represents the initial price at which the stock was issued when the company went public. It results from a simple arithmetic operation: dividing the total share capital by the number of shares issued.

Let’s take a concrete example. Suppose BUBETA S.A. has a share capital of €6,500,000 and issues 500,000 shares at its IPO. The calculation would be:

Nominal Value = €6,500,000 ÷ 500,000 = €13

However, this figure has very limited validity over time. The nominal value is mainly relevant in fixed-income instruments like bonds, where we know in advance that we will receive that capital at maturity. In the case of stocks, which have no defined maturity, this value quickly loses importance.

What the balance sheet really says: the book value

If we want to know what is happening internally in a company, the book value will reveal it. It is calculated by taking total assets, subtracting liabilities, and dividing the result by the number of shares issued.

This method is especially valuable for investors practicing value investing, the investment philosophy that seeks to “buy good companies at a good price.” The premise is simple: we only invest when the market price is below the value that the balance sheet actually assigns to the company.

Let’s see another example with MOYOTO S.A.:

• Assets: €7,500,000
• Liabilities: €2,410,000
• Shares issued: 580,000
• Book Net Value = ((7,500,000 - 2,410,000)) ÷ 580,000 = €8.78

To compare companies in the same sector, the Price/Book Value ratio (P/BV) becomes extremely useful. If we compare two gas companies listed on the IBEX 35 and Enagas has a P/BV of 0.55 while Naturgy shows 0.70, this suggests that Enagas is cheaper in terms of its book value.

However, this method has important limitations. It does not work well with tech companies or small caps, especially if they have significant intangible assets. Additionally, the presence of accounting irregularities can completely distort the analysis.

The market thermometer: market value

Market value is what we see on the screen every day: it is the actual price at which the stock is bought and sold. It is obtained by dividing the company’s total market capitalization by the number of shares outstanding.

In the case of OCSOB S.A., with a capitalization of €6.94 billion and 3,020,000 shares issued:

Market Value = €6,940,000,000 ÷ 3,020,000 = €2.30

This value is dynamic and responds to multiple factors that go far beyond the company’s accounting reality. Changes in interest rate policies, sector-related relevant events, economic expectations, or even speculative euphoria can irrationally drive the price.

How to apply each method in your investment decisions

The nominal value has very specific usefulness in certain financial instruments. For example, in convertible bonds, a future conversion price is set that acts as a reference similar to the nominal value. But in daily stock trading, its application is limited.

The book value is your ally when you want to analyze whether a stock is overvalued or undervalued from a balance sheet perspective. Imagine you want to invest in a listed gas company. By comparing the P/BV of the main candidates, you could determine which offers a better price-to-book ratio. In any case, this ratio should never be your only criterion: it should be combined with deeper fundamental analysis and other indicators like the PER or EPS.

The market value is your daily operational reference. It is the price you will use to establish entry points, set profit targets, or place limit buy orders. If META PLATFORMS is trading at $113.02 at close and you anticipate a decline, you can set a buy order at $109.00. The order will only execute if the market hits that level. Remember that trading hours vary: European stock exchanges operate from 09:00 to 17:30 (Spanish time), while the US market opens from 15:30 to 22:00.

The weaknesses of each approach

Each method has its weak points. The nominal value is simply obsolete in stock analysis. The book value can mislead you with small high-growth companies or firms with mainly intangible assets, and is also vulnerable to creative accounting manipulations.

Market value, on the other hand, is deeply influenced by uncertainty. It reacts to macroeconomic news, political decisions, sector expectations, and is not always rational. The market can greatly diverge from the underlying financial reality.

Quick reference table

Conclusion: integrate all three into your analysis

The key is not to choose just one, but to understand when to use each. The nominal value provides historical context. The book value shows if there is hidden value in the balance sheet. The market value allows you to execute real trades.

A sophisticated investor does not blindly cling to a single ratio. Use P/BV to identify undervalued candidates, but verify with fundamental analysis. Monitor the market price to find strategic entry points, but always remember that price and value can sometimes diverge significantly.

Stock market investing requires a deep understanding of these three dimensions. Only then will you avoid falling into overvaluation traps or missing opportunities due to lack of analysis.