What is Face Value in Share Markets?
As an investor, it is important to understand the key concept of the face value of shares and bonds. Whenever a publicly listed company issues its stocks through Initial Public Offering (IPOs), it fixes a price which is the face value. It is simply the price at which you purchase the shares of a particular company.
Also known as the par value, face value is the value of the company as listed in its books and share certificates. It is fixed by the company, once it decides to issue its shares and bonds.
Understanding working of face value of shares and bonds:
All companies issue shares and bonds at face value. There are no fixed criteria for fixing the face value of shares by a particular company. Typically, it is arbitrarily assigned by the company. Assigning face value is important from the company’s perspective as it helps the entity to calculate the accounting value of its shares. This value is then used in its balance sheet.
The face value of the shares and bonds is clearly mentioned in the share/bond certificate. To know about the face value of shares, you are simply required to refer to your Demat Account. Knowing the face value of shares is the foremost step required, before you start trading in stocks.
Importance of face value in stock markets:
The face value of a security is an important parameter for calculating various key aspects concerning shares and bonds. Face value can help calculate:
- Market value of shares
- Premiums
- Returns
- Interest payments
Let’s understand the importance of the face value of shares with the help of an example. Suppose, a company wants to raise Rs 10 crore from the market to meet its business requirements, it can offer 10 lakh bonds with the face value of Rs 100 each. The face value fixed by the company will help it calculate the various associated expenditures, like interest payments. If the company has decided to pay 3% interest on its bonds, its expenditure towards payouts will be Rs 30,000 on an annual basis.
Difference between face value and market value:
It is easy to get confused between the face value and the market value of a security, especially if you are a new investor. Knowing the difference between the face value and market value is important before you commence trading in stock markets. You can refer to the chart given below.
| Face value | Market Value |
|---|---|
| Remains unaffected by market conditions | Fluctuates according to market conditions. Changes in price can be because of changes in macroeconomic indicators, government policies and international events. |
| The price is decided by the company | Price at which the stocks are traded in stock exchanges. It will change, once trading commences. |
| It is the nominal value of stocks at the time of issuance | It is the current price of the stocks as quoted in stock exchange |
| It can not be calculated as the face value is determined by the company | Market value can be calculated by dividing the total value of the company in the market with the total number of shares issued. |
Understanding book value:
Book value refers to the value of shares in the company’s book of accounts. It is another term that is often used while investing in stocks. It is calculated by dividing the company’s net worth or the difference between its assets and liabilities by the number of issued shares.
Can the face value of stocks change?
Face value of shares can change because of corporate actions, like stock splits. In the case of stock splits, the company divides the existing shares into units with a lower face value. For instance, if a company with a face value of Rs 20 per share has announced a stock splits of 1:1, it means that one existing stock has now been converted into two units with the face values of Rs 10 each. A stock split is a measure to increase liquidity and can help realise the true value of a company’s shares.
Conclusion
Terms like face value, market value and book value become essential while trading or investing in stocks. It becomes important to learn about these terms to effectively trade and generate wealth from the stock market.