How to interpret three key metrics for your investment decisions: nominal, accounting, and market price

When we decide to invest in stocks, we often encounter three different numerical references that can confuse any trader. This analysis delves into the operational differences between nominal value, book value, and market value, explaining which to use in each situation and why some successful investors focus more on one than the others.

The mathematical basis: where these three valuations come from

Each metric comes from completely different sources of information, and understanding their origin is essential for applying them correctly in your investment strategy.

The starting point: nominal value of the issue

When a company goes public, it establishes an initial share capital divided among all issued shares. This quotient generates what we call nominal value. For example, if a company like BUBETA S.A. has an initial share capital of €6,500,000 divided into 500,000 shares, each share would have an initial value of €13.

This calculation seems simple, but its practical relevance in the equity market is surprisingly limited. Unlike bonds, where the nominal value remains important until maturity, shares have no expiration date. Therefore, although mathematically it exists, most traders rarely consult this parameter directly. However, it remains useful as a historical reference to understand how much the price has evolved since the original issuance.

In instruments like convertible bonds, the nominal value regains prominence. These securities allow that at maturity, instead of returning capital in cash, the company delivers new shares at a predetermined price. For example, in the May 2021 issuance of IAG convertible bonds, this price was set as a percentage of the historical average quotation over a specific period.

The accounting perspective: what does the company’s balance sheet say

When we want to know what the theoretical price of a share should be based on the company’s financial health, we turn to the book value. It is obtained by subtracting total liabilities from total assets, and dividing the result by the number of shares outstanding.

Take the example of MOYOTO S.A.: with assets of €7,500,000, liabilities of €2,410,000, and 580,000 shares issued, the net book value would be €8.775 per share. This number literally reflects what the company’s accounting records as the residual value per share.

Here arises a fundamental question: is the share expensive or cheap compared to what its balance sheet indicates? This is precisely the kind of analysis practiced by investors like Warren Buffett under the value investing approach. His philosophy can be summarized in one phrase: “buy good companies at a good price.” The combination requires two conditions to be met simultaneously:

• The company must have a solid balance sheet and a profitable business model
• The market price must be below the value that this balance sheet would assign

If only one of these conditions is met, value investors typically refrain from investing. A company with excellent fundamentals but overvalued stock is avoided; likewise, a company with a low price but questionable financial statements also does not attract investment.

The current data: what the market is willing to pay now

Market value is simply the result of dividing a company’s total market capitalization by its outstanding shares. If OCSOB S.A. has a capitalization of €6,940 million and 3,020,000 shares outstanding, the market value would be €2.298 per share.

This number represents the current consensus of all buyers and sellers negotiating simultaneously. It does not reflect “what it should be” but “what it is,” discounting in real time all expectations, fears, and speculations of the moment.

Strategic applications according to your investment style

Each metric serves different purposes depending on how you operate and what objectives your portfolio pursues.

When nominal value still matters

Its main application today is limited to convertible bonds and some hybrid instruments. In traditional stock trading, it functions more as a historical reference than as a decisive tool. Observing whether a stock trades well above its nominal value can indicate how much the perception of value about the company has grown since issuance, but this is mainly cultural information, not operational.

Book value as a filter for fundamental investors

Investors practicing value investing constantly monitor the Price/Book Value ratio (P/VC). This ratio acts as a detector of potential valuation inefficiencies.

Consider two gas companies in the IBEX 35. If ENAGAS trades with a P/VC ratio lower than NATURGY, it means that for each euro of book value, ENAGAS is cheaper in the market than NATURGY. This suggests a potential opportunity, provided both companies share similar fundamentals and the market has no special reasons to discriminate between them.

However, this metric has significant limitations. Tech companies and small caps often generate major distortions in book value because their intangible assets (patents, code, brand, human capital) are not always properly reflected in books. Additionally, creative accounting practices can inflate or obscure the true financial situation.

Market value as a daily operational compass

In your trading platform, market value is the only thing that matters at the moment of executing an order. If you want to buy META PLATFORMS after a sharp drop, you set a limit order at a specific price, say $109.00 when the market closes at $113.02. Your order will only execute if the actual price falls to that level or below during the next session.

It is crucial to remember that trading hours vary:

• Spain and major European exchanges: 09:00 to 17:30
• United States: 15:30 to 22:00
• Japan: 02:00 to 08:00
• China: 03:30 to 09:30

Outside these hours, your orders are pre-set, executing only if the market reaches the conditions you specified.

Practical limitations of each approach

Nominal value: outdated for equities

Its main disadvantage is that it becomes obsolete very quickly after issuance. In stocks (unlike fixed income with maturity), it has virtually no interpretive value. It is a historical number useful for context, but not for operational decisions.

Book value: ineffective for certain sectors

It works reasonably well in traditional companies with tangible assets predominant (banks, real estate, industrials). But it systematically fails with:

• Tech companies, whose real value lies in software and data, not buildings or machinery
• Small caps with few lines of business and higher accounting volatility
• Companies with accounting tricks that distort the true state of equity

A balance sheet can be technically correct but misleading if it uses creative accounting.

Market value: hostage to emotional cycles

The quotation reflects not only business realities but also:

• Monetary policy decisions and interest rates (the announcement of aggressive hikes depresses values; lax policies boost them)
• Sector-specific relevant events affecting commercialization or development
• Changes in macroeconomic expectations of the company’s country of origin
• Speculative trends that generate irrational euphoria in certain sectors

In periods of collective enthusiasm, market value can irresponsibly overprice; in panic, it can irrationally undervalue. The market tends to overinterpret or underestimate information depending on prevailing sentiment.

Quick reference table

Summary for your next investment decision

Sophistication in investing lies in knowing when to apply each tool. There is no single “correct value”; there are three complementary perspectives, each illuminating a different aspect of reality.

If your strategy is short-term operational, market value is your absolute guide. If your goal is to identify quality companies at attractive prices, book value and its relation to price are essential, though never sufficient alone. Nominal value remains in the background, mainly useful for historical context and certain derivatives.

What sets successful investors apart is the ability to triangulate these three references, understanding what each narrates, where they fail, and how to integrate them into a decision supported by broader analysis. Remember that no individual metric holds the absolute truth; they are pieces of a larger puzzle that includes fundamental analysis, technical analysis, and risk management.