I just realized that many investors confuse three key concepts when valuing stocks: nominal value, book value, and market value. The truth is, each one tells a different story about the same asset, and if you mix them up, you end up making wrong decisions.

Let's start with the basics. Nominal value is the simplest to calculate but also the least useful for trading stocks. It is obtained by dividing the company's share capital by the total number of issued shares. Imagine a company with a share capital of 6.5 million euros and 500,000 shares: the nominal value would be 13 euros. End of story. It’s the starting price, nothing more. In reality, nominal value is more relevant in bonds and fixed income securities, where you know you will recover exactly that amount at maturity.

Now, the book value or net book value is where things get interesting. It is calculated by taking total assets, subtracting liabilities, and dividing the result by the number of shares issued. This number tells you what is actually recorded in the company's books. If a company has 7.5 million in assets and 2.4 million in liabilities, with 580,000 shares, its book value would be approximately 8.77 euros per share. This is what it should theoretically be worth.

But here’s the important part: the actual market value of a stock is completely different. Market value is simply the price at which it is traded in real time, resulting from the matching of buy and sell orders. It is calculated by dividing the market capitalization by the number of shares. If a company has a market cap of 6.94 billion euros and 3.02 million shares, the actual market value would be about 2.30 euros per share.

See the difference? Book value tells you what accounting reflects. Actual market value tells you what investors are willing to pay right now. Sometimes they match, sometimes they don’t.

The reason this matters is because nominal value and book value serve to detect whether a stock is expensive or cheap. Those of us practicing value investing, following Warren Buffett’s approach, look for companies with solid balance sheets where the market price is below what the book value suggests. It’s like finding a solid business at a discount price.

Take the example of Spanish gas companies. If you compare the price-to-book ratio between two companies in the sector, you can see which one is cheaper relative to its book value. Enagás might have a lower ratio than Naturgy, suggesting it’s more undervalued compared to its book value. But beware: this ratio is not the absolute truth. You need to look at more factors.

Market value is what you see on your screen every day. It’s dynamic, constantly changing, and influenced by factors that often have nothing to do with the company. A monetary policy decision, an interest rate announcement, sector news, or even general market euphoria can cause the actual value to rise or fall irrationally.

There are limitations to each method. Nominal value is practically useless after issuance. Book value fails when trying to value tech companies or small firms with many intangible assets, plus accounting tricks can distort it. And market value, well, is entirely at the mercy of market uncertainty.

In practice, when trading, you need to understand all three. Nominal value is more of a historical reference. Book value helps you identify value investing opportunities. And market value is your daily benchmark for entering and exiting positions.

What I’ve learned is that it’s not enough to look at just one ratio. The nominal and market values of a stock should be analyzed in context. If you see the price well below the book value but the company’s balance sheet is a mess, don’t invest. If the balance sheet is solid but the price is excessive, wait. Only when the balance sheet is good and the price is below what it should be do you have a real opportunity.