Book value, Face value and Market value of a share

Difference between face value, book value and market value.

Let us understand these all terms with an example of a story so that you never face any problem regarding these terms in future.

There are three friends A, B and C. They start a new business with the capital of 10 lakhs. In which A contributes the capital of  5 lakhs, B contributes the capital of 3 Lakhs and C contributes the capital of 2 lakhs. 

They think that they might have faced problems of capital transfer and distribution in the near future if they were required to add another person in the business. So they divided their capital into 1 lakh shares of 10 rs each. So this 10 rs is called face value which is their initial investment. 

Now they continue the business and next year they earn the profit of 10% in their capital. They want to grow their business so they don't withdraw completely but 50% of their profits. Hence next year their capital becomes 10 lakhs plus 50 thousands profits.They continue doing this for 5 years . After 5 years by doing this their capital becomes double i.e 20 lakh in the book. Now their value in the book is 20 rs per share. This 20 rs per share is called book value.

Now they wanted to expand their business outside the country or within the country but different states for this purpose they are required funding. They approach investors with an IPO that is my book value we have worked hard and doubled our money with in 5 years you gave us money we will do business from your money and will double it with in 5 year but for this purpose we will charge premium so they decide a price band let say 25 rs - 30 rs now investor starts bidding within the band and company got listed with the price assuming 28 rs based on demand and supply so this 28 rs is called market price.