Face Value of Shares – Meaning, Working & Importance
If you are planning to invest in the stock market, you should be well aware of the face value of a stock. From the standpoint of a firm, assigning face value to its shares is very crucial, which is determined after assessing various factors. Keep reading to know more about face value and its utility.
What Is the Face Value of a Share?
When a company issues shares through Initial Public Offering (IPO), it fixes a price for its shares. The price at which company shares are listed in the stock exchange at the beginning includes the face value of the share plus a premium. In other words, the face value is the nominal value of the shares, that is, their original cost, as mentioned in the share certificate.
Also known as the par value, face value also denotes the value of the company that is recorded in share certificates and books.
However, it can change due to certain corporate actions. If a company announces a stock split of 1:1, existing stock will get converted into two units. For example, if the face value of a stock was ₹40, now the two units of stock after splitting will have a face value of ₹20 each.
In the stock market, face value stands for nominal value or original cost of the stock. It is to be noted that the face value of a stock does not have any relation with its prevailing price.
Every company issues its shares at the price that includes face value and premium There is no specific method of fixing the face value of shares. A company typically assigns it arbitrarily. After determining the face value of a stock, companies use it to calculate the accounting value of its shares.
Knowing the face value of your shares is important. In order to find out the face value of the shares, you simply need to refer to share details in your broker app or any other platform.
Importance of Face Value in the Stock Market
Face value is an important parameter for various calculations in relation to shares. It can help in calculating the market value of shares, assist in calculating the returns, and help in the process of calculating premiums as well as interest payments. Face value holds high importance in the stock market.
For example, let’s say that a company wants to raise ₹1 crore from the market to meet certain business requirements. The company can offer 1 lakh shares with a face value of ₹50 each. The share price will be 100 that is the sum of face value of ₹50 and premium of ₹50. This face value, fixed by the company, will help in the calculation of associated expenditures like dividend payments. If a company is planning to pay 2% dividend on the face value of shares, their annual spending towards dividend pay-outs will be ₹10,000.
What Are the Differences Between Face Value and Market Value?
The market value of a share is the price at which it would be traded in a stock exchange. It changes throughout a trading session as per the supply and demand.
The differences between a stock’s market value and face value are discussed below:
|Parameter||Face Value||Market Value|
|Meaning||It is the nominal price of the stock at the time of its issuance.||It is the present price of a share in the stock market.|
|Determination||The issuing company determines the face value of its stock.||This value changes as per the supply and demand of the share in an exchange.|
|Fluctuation||Remains unaffected by market conditions.||Fluctuates as per the market conditions. This can happen due to changes in government policy, macroeconomic indicators, and global events.|
|Calculation||There is no specific way to calculate as the company determines the face value.||Can be calculated by dividing the total value of the company by the number of outstanding shares.|
What Is Book Value?
This refers to the value of shares in the book of accounts of a company. It is a common terminology which is used by investors and shareholders. You can calculate the book value per share by determining the difference between the entity’s assets and liabilities (company’s net worth) and dividing it by the number of issued shares.
In other words, the book value of a company denotes the total value of the assets that the shareholders will receive upon liquidation. In contrast, face value is the value of a company that is mentioned in its share certificate.
Terms like face value, book value and market value are essential parameters when it comes to trading and investing in stocks. In order to effectively trade as well as generate wealth from the stock market, it is crucial to learn about these terms.
Frequently Asked Questions
Is it possible to increase the face value of a share?
Yes, it is possible to increase the face value of a share by passing shareholders’ vote and changing the Capital Clause of Memorandum of Association. Moreover, if the company trades publicly, it will require submission of a number of forms to Stock Exchanges and Registrar of Companies.
What is a bond’s par value?
Bond’s par value is its face value. Interest payments of a bond are calculated as a percentage of the face value. Similarly, the value of a stock indicated in corporate charter is known as the par value of shares. Par value of shares is usually very low. In case of equity, par value has almost nothing to do with the market price of shares.
What is the minimum face value of a share?
Securities and Exchange Board of India (SEBI) has decided the minimum face value of a share to be ₹1. Majority of the companies generally have a face value of ₹1, ₹10, or ₹100.
How can a share’s face value be reduced?
The promoter can reduce the face value of a share by splitting the shares or by issuing bonus shares.