Understand the Face Value of a Share: Some of the biggest challenges while entering the world of investing involves dealing with multiple jargons. In this article, we explain a very common confusion in the understanding of Face Value and other related terms.
What is the Face Value of a Share?
The Face Value of a share in simple terms is the value of the share on paper i.e. the original cost of the share. The face value of the shares is also known as the nominal or par value of a share. When it comes to stocks the face value of a share will be mentioned in the share/bond certificate issued. If you already hold shares or know someone who does you can view the face value of the shares in the Demat Account.
Who sets the Face Value?
The shares of Reliance have a face value of Rs. 10 whereas ITC has a face value of Rs. 1. If we take a look at the global markets Apple has a face value of $0.00001. So who sets this amount or through what computation do we arrive at this figure?
First of all, it is important to understand that there is no fixed method or regulation for setting up the face value. These values are assigned arbitrarily by the company when the company gets listed on a stock exchange through an Initial Public Offer (IPO).
The value however may affect the volatility of the shares in the market post the IPO. Take for example two companies ABC Ltd. and XYZ Ltd opt for an IPO to raise Rs. 1,00.000. ABC Ltd sets its share price at Rs. 10 and XYZ set its price at Rs. 1. This means that post the IPO ABC Ltd. will have 10,000 shares available in the market and XYZ Ltd. 1,00,000 shares. This means that there are more individual shares of XYZ Ltd. for purchase.
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What is the difference – Face Value vs Market Value?
Another very important point to note is the difference between the face value and the market value of a share. These two have no relation and do not affect each other except in some special circumstances.
Let’s take again the example of the 3 companies mentioned above. The shares of Reliance, ITC, and Apple have a market value of Rs. 2005.35, Rs. 213.25 and $127.90 respectively. These values vary greatly from the face values we observed earlier.
The Market Value is arrived at due to the factors of demand and supply for the particular share in the market. A greater demand oversupply would show an increase in the market value and vice versa the price will fall.
The shares we saw above have a high market price because they are highly demanded as long as they maintain good growth and give good return prospects. Their market value may fall too if the company begins performing poorly affecting the demand for the shares. The factors of demand and supply will have no impact on the face value of the shares.
Why is the Face Value Important?
Being a prospective investor you must be wondering if the face value is not the price at which you eventually buy/sell the shares then why is it even important. The Face Value is used in the internal accounting for the company’s stock. One can find the face value used in the balance sheet to arrive at the total equity capital.
In addition to this, face-value also plays a very important role in corporate action. These include corporate actions like dividends, stock splits, reverse stock splits, etc. When it comes to dividends the face value sets a standard for the calculation of return rates or yield. Stock Splits on the other hand are one of the special occasions where both the face value and the market price are affected.
That’s all for this article. Let us know if the article helped in clearing doubts related Face Value of a stock.
You can read the difference between Face Value, Market Value & Book Value to get more insights. Also, comment on which other jargon you would like us to cover in our next post. Welcome to the world of investing. All the best!
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.