Book value, also known as book cost or average cost, represents the average amount you have paid for your investments – which can change over time (see how below). When you sell your investments in a non-registered account, book value is used to determine your capital gain or capital loss for tax purposes. Here are some top questions investors ask about book value.
What is book value?
Book value refers to the original price you paid for a security plus transaction costs, adjusted for any reinvested dividends, corporate reorganizations and distributions, such as return of capital. In its simplest form (absent from adjustments), the book value calculation is pretty straightforward. For example, suppose you purchased 100 shares of company XY at $20 per share. Your book value would be $2,000 (100 x $20).
Is book value the same as market value?
Book value is not the same as market value. The market value of a security is based on its market price at a specific point in time, and is affected by fluctuations in the market. The book value of a security is not affected by the rise and fall of prices in the market. Let's say the price of XY that you purchased at $20 rises to $25. Themarket valueof your security, XY, is now $2,500 (100 x $25), but thebook valueis still $2,000.
Can book value change?
Yes, it can change when you buy the same security over time at different prices, which leads to changes in the average price you paid for the investment. For example, if you bought 100 shares of XY at $20, and later purchased another 100 shares at $25, your book value would be $2,000 plus $2,500, or $4,500. Your book value per share, which represents the average cost you paid, would be $4,500 divided by 200, or $22.50 per share. Book value is also adjusted when you use dividends to purchase additional shares of the same company through a Dividend Reinvestment Plan (orDRIP1), and when reinvesting mutual fund distributions and ETF distributions into additional units. Book value may also change if you receive return of capital distributions from a Canadian corporation, mutual fund or ETF, for example (more on this below).
How does book value affect taxes?
You need to know a security's book value in order to calculate the capital gain or capital loss when you sell it. In the example above, if you choose to sell your 200 shares of XY at $30 for a total of $6,000, your capital gain would be $1,500 ($6,000 minus $4,500 book value = $1,500).Note:This only applies to investments you hold in non-registered accounts. In registered accounts like RRSPs, RRIFs, TFSAs and RESPs, you pay no capital gains taxes on qualified investments.
Do return of capital distributions affect book value?
For certain investments, you may receive a non-taxable payment called a return of capital. This typically represents a portion of the money you originally paid for an investment (invested capital) that is distributed back to you in the form of a payment in cash or more units while you hold the investment. These payments are not taxed as income or capital gains, however they do reduce your book value. This may lead to a larger capital gain (or smaller capital loss) when the investment is sold.Note:If your investment is held in a non-registered (taxable) account, it is important to track your return of capital distributions and adjust your book cost, also known as Adjusted Cost Base (ACB) for tax-reporting purposes. This is to ensure you are correctly reporting capital gains and losses to the Canada Revenue Agency.
Book Value and Your RBC Direct Investing Account
How do I know what my average price is for a security I bought?
Head online to the My Portfolio Holdings page where you’ll find the Average Cost column next to Quantity when viewing an individual account. For grouped account views, your average cost can easily be determined by dividing the Book Cost column by the number of shares showing under Quantity.
Why do I need to provide book values of my securities?
For two reasons. In non-registered accounts, you will need to know the book value of a security to determine the capital gain or loss when you sell it. Also, knowing the book value will help you stay informed as you track your security over time.When you purchase a security in your RBC Direct Investing account, we update the market value and book value for you.Note:If you transfer in a security and you don't advise us of the book cost, the market value at the date of transfer (and not the cost of the investment) is used as the book cost and adjusted afterwards as described above.
How do I provide RBC Direct Investing with book values of my securities?
If you are making a transfer from a financial institution outside of RBC, you can download and fill out the Book Cost Form. You can find the Book Cost Form on the page under the My Portfolio menu. Then send it back to us, together with proof of the book cost (like a recent monthly/quarterly statement from the financial institution). If you are transferring securities from another RBC business like RBC Royal Bank or RBC Dominion Securities, you typically do not need to submit the Book Cost Form. If the book value of your transferred securities does not appear in your account(s), you will need to provide an account statement or other proof of the book cost.
How do I know if the book value I provide is correct?
RBC Direct Investing will not verify for tax purposes the book value you provide. You are responsible for ensuring the accuracy of the book value for tax purposes. Once the security is in your account, we will update the book value for you if more shares or units of the same security are purchased.
What happens if I don't provide book value to RBC Direct Investing?
We will use the market price of the security when it is transferred in to your account as the book value. You can find this under the “Average Cost" column on the My Portfolio Holdings page. When a security is bought and sold over time, the information may not be accurate for tax or performance measurement purposes due to discrepancies between the market and book values.
| Date of transaction | Security | Type and quantity | Price per share | Total Book value | Book value per share |
| Jan 7 | XY | Buy 100 | $20 | $2,000 | $20 |
| May 6 | XY | Buy 100 | $25 | $4,500 | $22.50 |
| Sept 9 | XY | Sell 100 | $30 | $2,250 | $22.50 |
In this example, your sale of 100 shares on September 9 would generate a capital gain of$750($3,000 (100 x $30) minus $2,250 (100 x $22.50) = $750). The book value of your remaining 100 shares would still be $22.50 per share, which represents the average price you paid for the total number of shares.
Find the Book Cost Form on the page under theMy Portfoliomenu online.
Book value can change when you buy the same security over time at different prices, which leads to changes in the average price you paid for the investment. You need to know your book value in order to calculate the capital gain or capital loss when you sell a security in a non-registered account.
The information provided in this article is for general purposes only and does not constitute personal financial advice. Please consult with your own professional advisor to discuss your specific financial and tax needs.
COMMENT
View Legal Disclaimer
RBC Direct Investing Inc. and Royal Bank of Canada are separate corporate entities which are affiliated. RBC Direct Investing Inc. is a wholly owned subsidiary of Royal Bank of Canada and is a Member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. Royal Bank of Canada and certain of its issuers are related to RBC Direct Investing Inc. RBC Direct Investing Inc. does not provide investment advice or recommendations regarding the purchase or sale of any securities. Investors are responsible for their own investment decisions. RBC Direct Investing is a business name used by RBC Direct Investing Inc. ® / ™ Trademark(s) of Royal Bank of Canada. RBC and Royal Bank are registered trademarks of Royal Bank of Canada. Used under licence.
© Royal Bank of Canada 2021.
1 The list of DRIP eligible securities is subject to change at any time without prior notice. RBC Direct Investing will purchase whole shares only. Some exclusions may apply. Some eligible securities such as preferred shares and voting class common shares will not reinvest into additional units of the same security but rather the underlying non-voting common share or similar security.
The views and opinions expressed in this publication are for your general interest and do not necessarily reflect the views and opinions of RBC Direct Investing. Furthermore, the products, services and securities referred to in this publication are only available in Canada and other jurisdictions where they may be legally offered for sale. If you are not currently resident of Canada, you should not access the information available on the RBC Direct Investing website.
FAQs
What is book value and why is it important? ›
Key Takeaways
The book value of a company is the net difference between that company's total assets and total liabilities, where book value reflects the total value of a company's assets that shareholders of that company would receive if the company were to be liquidated.
Book value is considered important in terms of valuation because it represents a fair and accurate picture of a company's worth. The figure is determined using historical company data and isn't typically a subjective figure. It means that investors and market analysts get a reasonable idea of the company's worth.
What is book value defined as? ›Book value is an accounting term used for both a measure of a business's equity and the value of an asset as it appears on a balance sheet. In the case of a business, book value is usually calculated as part of a sale, investment decision or liquidation of the business.
What is book value quizlet? ›Book Value: the balance sheet value of the assets, liabilities and equity. Market Value: True value, the price at which the assets, liabilities, or equity can actually be bought or sold.
What is meant by book value and how is it determined? ›In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset.
What is book value with example? ›For instance, if a piece of machinery costs Rs. 2 lakh and its accumulated depreciation amount to Rs. 50,000, then the book value of that machinery would come about to be Rs. 1.5 lakh.
Why do we use book value instead of market value? ›Book value and market value are two ways to value a company. Book value is based on a company's balance sheet while market value is based on a company's share price, which changes often due to stock market sentiment. Book value represents the financial strength of a company based on its assets, an objective number.
How important is book value per share? ›Generally, the book value per share is used by investors (especially value investors) to determine whether a share is fairly valued. If the BVPS is less than the price of the stock, then that tells an investor that the stock could be overvalued—it costs more than the assets it's entitled to.
What is book value of inventory? ›Book Value of Inventory means the fully absorbed standard cost of inventory, based on Seller's records of item quantities and Seller's 1996 standard costs.
What is a good book value? ›Traditionally, any value under 1.0 is considered desirable for value investors, indicating an undervalued stock may have been identified. However, some value investors may often consider stocks with a less stringent P/B value of less than 3.0 as their benchmark.
Does book value mean equity? ›
The equity value of a company is not the same as its book value. It is calculated by multiplying a company's share price by its number of shares outstanding, whereas book value or shareholders' equity is simply the difference between a company's assets and liabilities.
How do you read book value? ›To find its book value, you have to look at its financial statements, and all the assets and liabilities listed on its balance sheets. Add up all the assets, subtract all the liabilities and the result is the book value.
Is book value the true value? ›Yes, book value can be a good indicator of a company's value. If the book value per share is higher than its market value per share then it can indicate an undervalued stock. If the book value per share is lower than its market value per share, it can indicate an overpriced, or overvalued stock.
What is book value in GAAP? ›Under general accounting principles, “book value” has a standard definition, namely a company's assets over its liabilities. [Last updated in June of 2021 by the Wex Definitions Team]
Is book value Fair Value? ›Book value indicates an asset's value that is recognized on the balance sheet. Essentially, book value is the original cost of an asset minus any depreciation, amortization, or impairment costs. On the other hand, fair value is referred to as an estimate of the potential value of an asset.
What is the difference between book value and original value? ›Its book value is its original cost minus depreciation. When you purchase an asset, you must record it at its book value in your small business accounting books. And, be sure to create journal entries showing the amount of depreciation.
What does high book value mean? ›As it is calculated using the total assets a company owns, a company that has significant physical assets will have a high book value.
How does book value increase? ›Increase assets and reduce liabilities
A company can also increase the book value per share by using the generated profits to buy more assets or reduce liabilities.
Book Value = Total Assets – Total Liabilities
The net book value of a company is not the same as the market value of a company, since the book values of the assets and liabilities are not the same as the market values of all the assets and liabilities.
Book value is calculated by taking the balance sheet's difference between assets and liabilities. The market value of a company is calculated by multiplying the market price per share of the company with the number of outstanding shares.
Is book value equal to the selling price? ›
Book value is equal to the amount of the cost of the item when it was first purchased minus its accumulated depreciation. In business, the book value of an asset is recorded when the business values its assets based on the original costs when they were purchased minus their depreciation.
Do you want a high or low book value per share? ›Book value per share is a good way to measure a company's financial health. It shows how much equity the company has on its balance sheet. The higher the book value per share, the better off the company is.
Is it good to buy stock less than book value? ›The lower a company's price-to-book ratio is, the better a value it generally is. This can be especially true if a stock's book value is less than one, meaning that it trades for less than the value of its assets. Buying a company's stock for less than book value can create a "margin of safety" for value investors.
Can book value be negative? ›A negative book value means that a company has more total liabilities than assets. It owes more in numerical terms, but it's not automatically bad news for investors. There are many factors to consider when assessing whether this may be good, bad or indifferent regarding your investment potential with them.
What affects book value of equity? ›The book value of equity can be affected by a number of factors, including changes in the value of assets, changes in the value of liabilities, and changes in the amount of paid-in capital or retained earnings.
Is book value an asset? ›Book value refers to the value of an asset recorded on a balance sheet —that is, its value after accounting for accumulated depreciation. Every business owns several assets. Therefore, every business also has a book value representing the current value of its assets minus its liabilities or outstanding debts.
What is a good book value for a stock? ›Traditionally, any value under 1.0 is considered desirable for value investors, indicating an undervalued stock may have been identified. However, some value investors may often consider stocks with a less stringent P/B value of less than 3.0 as their benchmark.
What is book value for dummies? ›Book value is the value an accountant gives a capital asset in a company's financial records, namely its balance sheet. It's the purchase price minus depreciation and any impairments up to that point. In the context of a business, it refers to the total value of the company's physical assets minus its liabilities.
Is book value a good indicator? ›Yes, book value is a good indicator of a company's valuation. When investors invest in a company, they are owners of its assets.