When you start investing in stock market, one of the first things you’ll encounter is the concept of face value of share. It is the “starting price” of a share or bond when a company issues it. This number isn’t just a figure on a certificate; it plays a key role. It forms an important part of stock splits, dividends, and even how companies raise money through IPOs.
How do companies adjust their stock prices and how it affects your investments.? Let us understand the concept of fair value of a share.
Share or Bond Certificate
When companies issue shares or bonds, they come with a specified value called the face value. This value is typically set by the company itself and can vary based on several factors.
A share certificate is a document issued by companies to confirm the ownership of shares. It includes important details such as the face value of the shares, their class, issue dates, and other relevant information.
Now, for companies, setting a face value is crucial as it helps in determining the accounting value of the shares. This value is then recorded on the company’s balance sheet.
This face value listed on the share or bond certificate is important for investors too. It helps in understanding their initial worth before they start trading on the market.
What is the Face Value of a Share?
Face value, or par value, is the nominal value of a share set by the company when it issues the share. It’s like the original price printed on the share certificate. For example, if a company issues shares with a face value of ₹10 each, that’s what it’s worth on paper.
What is Face Value of Share with Example?
Let’s consider a hypothetical company, XYZ Ltd., which issues 1,000 shares with a face value of ₹10 each. This means the total equity share capital of XYZ Ltd. is ₹10,000 (1,000 shares * ₹10 face value per share).
However, it’s important to note that the face value is different from the current market price.
Face Value vs. Market Value
The face value is a static number used for accounting, the market value reflects what people are willing to pay for the share at any given time.
- Face Value: This is the fixed value set when the share is issued. It doesn’t change unless there’s a stock split or similar action.
- Market Value: This is the current trading price of the share. It can fluctuate based on market conditions, company performance, and investor interest.
How Does Face Value Work?
The face value is mainly for accounting purposes. It represents the price of the share when it was first issued and stays the same unless the company decides to split the shares. For instance, if a company with a ₹10 face value share announces a 1:2 split, the face value will be adjusted to ₹5.
Why is Face Value Important?
Adjustments in face value happen during corporate actions like stock splits and bonus issues. These adjustments help make shares more accessible and can increase trading activity by adding more shares to the market.
Price-to-Earnings (P/E) Ratio
Return on Equity (ROE)
Importance of Face Value in Dividend Calculations
Dividends are often based on the face value of shares. This provides a consistent basis for determining dividend amounts.
Face Value in Bond Investments
For bonds, face value is the principal amount repaid at maturity. It’s essential for calculating interest payments.
Role of Face Value in Bookkeeping and Accounting
Face value is crucial for accurate financial records. It helps in calculating the value of shares and supports transparent financial reporting.
Face Value in IPOs
During an Initial Public Offering (IPO), the face value of shares is set to raise capital for company growth. It helps in pricing the shares and attracting investors to the IPO.
Legal and Regulatory Compliance
Face value is used for regulatory compliance and standardized financial reporting. It ensures market integrity by providing a consistent measure for evaluating shares.
Interestingly, the term “face value” is synonymous with “par value.” Historically, stockholders were paid this par value, often via a check. This practice gave rise to the term “stock” itself, originally referring to a “certificate demonstrating ownership of stock.”
Face Value of Share Formula
Understanding the face value of a share starts with a simple yet significant face value formula:
Face Value of a Share = Equity Share Capital / Outstanding Share Numbers
This formula breaks down the equity share capital of a company into individual shares. Dividing the total equity share capital by the number of outstanding shares provides the nominal value of each share.
Modifying the Face Value of Stocks
Corporate actions like stock splits can change the face value of stocks. For instance, in a 2-for-1 stock split, a company increases the number of shares. However, it reduces the face value of each share by half. This can make shares more affordable and increase the market liquidity.
Conclusion
Understanding the face value of a share is fundamental for any investor entering the stock market. It serves as the starting point for various financial calculations and corporate actions. However, you must remember that the face value does not reflect the market value of a share.
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FAQs | Face Value of a Share
A higher face value just means the nominal price is higher, but it doesn’t affect the stock’s market performance or value directly.
Face value is the original price set by the company when shares are issued. For example, if a share has a face value of ₹10, that’s what it was originally worth on paper, not necessarily its current market price.
Face value, or par value, is the nominal value assigned to a share by the company. It’s used mainly for accounting purposes and helps calculate dividend.
Face value is set by the company and is not calculated. It’s the value stated on the share certificate, determined at the time of issuance.
Face value is the nominal value of a share, while the issue price is what investors pay for the share during an IPO. The issue price is usually higher than the face value.
Face value is vital in financial calculations, helping compute metrics such as EPS and P/E ratio. It offers historical context about the share’s initial cost and contributes to understanding a company’s net worth.
Face value helps in evaluating a share’s profitability and valuation. It’s used in EPS, P/E ratio, and ROE calculations, offering insights into a company’s financial performance.
Source: TheEconomicTimes
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.