Face Value of IPOs: Meaning and Importance
While investing in the stock market, you will have come across several important terms related to share markets. Not having a clear idea about these terms can become a challenge for your investment goals.
Face value is a common term for a price connected to a company’s share and listing. It is important for subscribers of an IPO to know the meaning of the share’s face value. Read the details below to understand this price and how it affects an IPO’s issue price.
What Is Face Value in an IPO?
When a company lists its shares to be sold to the public for the first time, the process is called an Initial Public Offering (IPO). IPOs are one of the most popular ways for companies to raise capital for expansion, repay debt or provide an exit option for existing shareholders.
The face value of an IPO is referred to the price at which each share of the company is listed for investors during an IPO. It is a fixed value for one share, which is decided by evaluating various factors like the company’s performance, market share and demand for the stocks.
Face value is determined as the original price of a share for its listing. A premium amount is added to a stock’s face value to decide its issue price, at which shares are sold to subscribers. A face value can be as nominal as ₹2 to as high as ₹1,000, depending on the company. Companies can also levy high or low premiums over this face value to decide the issue price.
Example of Face Value in IPO
To understand the meaning of face value in IPOs practically, refer to the example below.
A company, ABC Automobiles, announced to launch an IPO with a face value of ₹100 per share and decided to charge a premium of ₹10 per share. If you subscribe to 100 shares of this company, you need to pay ₹11,000 for an issue price of ₹110 per share. When this company is listed on the stock exchange, it starts trading at ₹ 120 per share and in four days, it reaches ₹200.
Now you can sell your shares for the market price, which is ₹200 per share. You will get ₹20,000 as a return and, thus, make a profit of ₹9,000 from your investment.
Thus you can see that face value is a nominal fixed price per share announced by a company. This is the price mentioned in share certificates, and it is used for computing issue prices, dividends and stock split. After the successful listing of a stock on an exchange, its price will change based on market supply and demand.
What Is the Importance of Face Value in an IPO?
The face value of a stock plays a vital role in the financial analysis of a stock’s performance. The following are some of the uses of face value of shares.
- Companies use face value to determine the value of a stock after a split. Unlike a stock’s current price or market value, its face value is fixed and not affected by market movements; thus, it is used to calculate stock split ratio and value.
- Dividends of shares are also offered on their face value and not their current prices.
- This value also plays an important role in deciding a stock’s premium for its IPO listing.
- Face value is also essential to calculate the profits of a company.
- It also helps investors compare companies’ premium and profit percentages while investing.
How to Calculate IPO Face Value?
As mentioned above, the face value of a share is determined based on the issuing company’s valuation. Hence, the formula for the face value of a company’s shares is its net worth (assets – liabilities) divided by the total number of shares being issued.
For example, if a company’s net worth is valued at ₹10,00,00,000 and it is announced to issue 10,00,000 fresh shares, its face value per share will be ₹100 (10,00,00,000/10,00,000).
What Is the Difference Between Face Value and Market Price?
Face value and market value of a share are both essential factors in determining its financial performance. The following table lists the differences between these two values.
|Face Value||Market Price|
|It is the initial value per share set by a company.||Market value is the current value per share of a company.|
|It is a fixed value. This value is not affected by market trends and other factors.||This value fluctuates. Market value changes based on market factors, economic changes, etc.|
|Face value is based on net worth and share division of a company.||It is based on market demand and supply.|
While subscribing for an IPO, knowing the face value is very important as it plays an important role in determining the issue price. The amount charged over this amount tells you whether the issue price is too high or low, helping you make an investment decision. You should not confuse terms like market value, issue price, current price, etc., with the face value when subscribing to an IPO.
Frequently Asked Questions
What is the minimum face value for a share?
Face value can be any amount based on a company’s net worth. However, as per SEBI, the minimum amount for a share is set at ₹1 per share.
Can a share’s market price be less than face value?
Yes, if a share can be traded at a discount or a premium due to market factors. If the share price falls below its face value, its market price will fall below its face value.
What is a premium on face value?
After determining the face value of a company’s share, the company listing itself will hike the share prices by a certain amount for subscribers. The differential amount between the hiked price and the face value is called a premium, which is determined based on investors’ demand and the company’s valuation.
What is the issue price?
The final price at which shares are sold to initial subscribers during an IPO is called issue price. It is different from face value as it is the cost per share after adding the premium asked by the company.