What is Face Value in Share Market, Importance and Formula Explained

Key Features of Face Value:

• Fixed: The face value of a share is set at the time of its issue and remains unchanged throughout the share`s existence.
• Nominal Value: It`s simply a nominal figure and doesn`t represent the true market value or price of the stock.
• Issued by Company: It is determined and set by the company at the time of the stock`s issue.

How to Calculate Face Value?

Calculating face value is straightforward, as it is typically set by the company when shares are issued. However, it is important to distinguish between face value and market value.

• Face Value: The nominal value or par value assigned to each share by the company at the time of issue.
• Market Value: The price at which a stock is being bought and sold in the market right now, which can be either much more or much less than its face value.

How Does Face Value Differ From Market Value?

One of the most important distinctions in the stock market is between face value and market value.

• Face value is a fixed, predetermined amount that represents the original value of the stock at the time it was issued.
• Market value, also known as market price, refers to the price at which a share is traded in the open market. It is determined by several factors including company performance, investor sentiment, supply and demand, economic conditions, and others.

For example, a stock with a face value of Rs.10 could be selling in the market for Rs. 500, Rs. 1000, or even higher. The price it trades at changes depending on how much people want to buy or sell it, but the face value stays the same.

Importance of Face Value in the Stock Market

Though face value might not always reflect a company`s current performance, it is still an essential concept for several reasons:

1.Determines Issuance Price:

When a company issues shares, it typically uses the face value as a reference to set the initial issuance price. In certain scenarios, such as rights issues or initial public offerings (IPOs), companies may issue shares at a price above the face value. This approach helps in raising the necessary capital while preserving the integrity of the share structure.

2. Dividend Calculation:

The dividend distributed to shareholders is typically determined as a percentage of the face value. For example, if a company announces a 5% dividend on a share with a face value of Rs.10, each shareholder would receive Rs. 0.50 per share. This is particularly important for investors who focus on dividends.

3. Stock Splits and Bonuses:

Stock Splits: In a stock split, a company takes its current shares and splits them into more shares. The value of each share is changed to match the new total. For example, if a company does a 2:1 stock split, a share that was worth Rs.10 would now be worth Rs.5, but the total value that the shareholder owns stays the same.

Bonus Shares: When a company gives bonus shares, it gives extra shares for free to the people who already own shares. The bonus is usually based on the face value of the shares. For instance, if the bonus is 1:1, then for every share someone owns, they get another share for free. The face value of the shares might change to show the new total number of shares.

4. Capital Structure:

The total capital of a company is typically determined by the total face value of its issued shares. For example, if a company has one million shares with a face value of Rs.10, the total capital contributed by shareholders, based on face value, would be Rs.10 million. This allows analysts to assess the company`s equity structure and overall valuation.

5. Legal and Regulatory Requirements:

The face value is important in a company`s legal and regulatory structure. For example, it can influence how the company offers shares, determines reserves, or handles shareholder rights. Regulatory bodies might ask for specific information based on face value, which helps keep everything clear and open.

Why Does Face Value Matter for Investors?

For most investors, the face value of a share is not a day-to-day concern. However, it still holds significance in some specific scenarios:

1. Stock Splits:

Investors should keep track of the face value when a stock split occurs. Although a split does not alter the intrinsic value of the investment, it can influence the number of shares held, which in turn affects voting power and dividend distributions.

2. Dividends:

Dividend yields are usually shown as a percentage of the face value. Even though this doesn`t change how much you pay for a share, it can impact your overall returns, especially if you`re looking for stocks that give you income.

3. Company`s Financial Strategy:

Understanding a company`s face value can assist investors in comprehending how the company structures its equity and capital. A company may choose to issue new shares at a premium above face value, indicating potential for growth, or it may issue shares at face value through a rights offering to raise capital.

4. Valuation Indicators:

While the face value of a company`s shares doesn`t show its real worth, but it can still give some clues about how the company`s shares were originally set up and might hint at future moves such as stock splits, bonus shares, or bigger changes like mergers or acquisitions.

Face Value and Investor Sentiment

The face value of shares can also show how investors feel about a company. When a company sells shares much higher than their face value, it might mean people think the company will grow and that the stock is in high demand. On the other hand, if shares are sold much lower than their face value, it could signal that the company is having financial problems or that investors don`t trust the company much.

Conclusion

The face value of shares is an important but usually ignored part of the stock market. Even though it doesn`t directly affect the daily prices of stocks, it has a big role in how a company`s stock is structured, how dividends are given out, and how the company manages its money. Knowing the face value can give investors a better understanding of how a company works and help them make smarter investment choices.