What is face value in the stock market?

As an investor, you must understand the fundamental notion of share and bond face value. When a publicly traded firm issues its stock through an Initial Public Offering (IPO), it sets a price that is known as the face value. It is essentially the cost of purchasing stock in a certain company.

Face value, also known as par value, is the value of the firm as it appears in its books and share certificates. It is determined by the company when it decides to issue shares and bonds.

Understanding how the face value of shares and bonds works

Every company issues shares and bonds at face value. There are no set criteria for determining the face value of a company’s shares. Typically, it is allocated arbitrarily by the company. From the standpoint of the firm, assigning face value is crucial since it allows the organisation to compute the accounting value of its shares. This figure is then utilised in the company’s balance sheet.

The share/bond certificate clearly states the face value of the shares and bonds. To find out the face value of your shares, simply log into your Demat Account. Before you begin trading stocks, you must first determine the face value of each share.

Understanding book value:

Book value refers to the value of a company’s shares as recorded in its books of accounts. Another word that is frequently used while investing in equities. It is computed by dividing the net worth of the company, or the difference between its assets and liabilities, by the number of issued shares.

Significance of face value in stock markets:

In the stock market, face value is a focal point. The Face Value is extremely important in the context of investment, stock exchanges, shares, and bonds. The following considerations demonstrate the significance of Face Value in the stock market.

• The current market value of a stock is determined by its face
• It aids in the premium calculation
• It is critical in estimating
• It is essential to calculate Interest

Let’s look at an example to see how important the face value of shares is. If a company wishes to raise Rs 10 crore from the market to cover its operational needs, it can issue 10 lakh bonds with a face value of Rs 100 each. The company’s set face value will assist it in calculating the different linked expenditures, such as interest payments.

Difference between Face Value and Market Value

The face value is the initial price at which the company is appraised (before it is listed in the stock market). After the firm is listed, the price at which it trades on the stock exchange becomes the share’s market value.

The market value of the shares is determined by market conditions, which are dynamic, whereas the face value remains static. The market capitalisation of a corporation is calculated by multiplying the number of outstanding shares by the market value.

Face value for calculating dividends

A dividend is paid when a company distributes a portion of its annual profits to its shareholders. The face value of a share is important in calculating dividends. This is why, as an investor, it is critical to know the face value of a stock in order to calculate dividends.

Let us illustrate with an example. Assume a share is trading on the market for Rs 100 but has a face value of Rs 10. When it declares a 10% dividend, the dividend is Rs 1 rather than Rs 10.

Face Value in case of a stock split

When a business decides to divide its stock, the face value is used. It is also critical to understand what happens to a share’s face value in the event of a stock split. A stock split is just a division of the face value, therefore in the instance of a 1:5 split, shares with a face value of Rs 10 would be reduced to Rs 2. However, the share price would also fall proportionally. As a result, the total value of your holdings will remain unchanged. In practice, this means that more shares will be available to investors.

Investors benefit from a general awareness of concepts such as face value, issue price, market value, and book value. For example, when we talk about face value, it influences business actions such as stock splits and dividends.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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