What Is Face Value of Share in Stock Market – Important Things To Know
What is the face value of a share?
Face value is the nominal price that a stock has been assigned by the company prior to the Initial Public Offering (IPO). It is the value of each share listed on the share certificate. The days of physical share certificates are long gone. Share certificates are now issued digitally.
The face value could range anywhere between Re 1, Rs 2, Rs 5, Rs 10, or whatever the company may determine is appropriate. However, Re 1 has been established as the minimal threshold by the Securities Exchange Board of India (SEBI) when determining the face value of shares.
Face value is calculated using two crucial elements of a company’s market journey, namely:
- Share Capital
- The number of outstanding shares.
The formula for which is:
Face value of a share = Equity share capital / Outstanding number of shares
A quick look at the face value of a share
- The capital equal to the face value of the shares must be retained by the company and cannot be distributed as dividends.
- When determining a stock’s accounting value for use in the company’s financial statements, face value is important.
- The market value of shares, premiums, dividends, interest payments, and other financial obligations are all determined using face value.
Face Value VS Market Value
| FACE VALUE | MARKET VALUE |
|---|---|
| At the time of issuing shares, the company determines the face value. | It is the balance sheet’s valuation of the stock that makes up the company’s share capital. The stock’s current market price is the price at which it is currently being traded on the stock exchange. You may purchase or sell shares of stock at that price. |
| A stock’s face value is constant and doesn’t change very often. For instance, the only situation in which the Face value is altered is during a stock split. | Market value, on the other hand, is extremely liquid and liable to frequent changes. |
| Face value is determined by the company. | A company’s market value is determined by the product of its outstanding shares and its market capitalization. |
Can a share’s market value ever be lower than its face value?
Although it’s not something we encounter frequently, it’s possible for a share’s face value to exceed its market value. In general, we observe that market values of shares are significantly higher than the face value.
Let’s examine a situation:
Let’s say XYZ Limited announced an initial public offering (IPO) with a face value of Rs 100 per share. However, the shares were discounted when they were listed on the stock exchange at Rs 80.
Here, we can see that the share’s face value is Rs. 100 while its market value is Rs. 80, creating a situation in which the market value is lower than the face value.
Face value’s importance
Face value for a company is more than just a numerical value. The objectives listed below can only be completed successfully if you understand the idea of face value.
Distribution of Dividend
Based on the face value of the shares, a company determines the dividend that will be paid to the shareholders.
Therefore, a dividend yield of 5% would indicate that the company pays dividends equal to 5% of the face value of each share, regardless of the share’s market value.
Consider the case of a bank share ABC, which currently trades at 200 rupees despite having a face value of just 10. Every shareholder per share is eligible to receive Re 1 if the company has declared a dividend of 10%. It also makes it abundantly clear that the company is paying dividends with a face value of Rs. 10 rather than Rs. 200.
Stock split
A stock split’s basis is face value. The basis of a stock split is face value. The face value of a share is never decreased other than in some particular circumstance.
Bottom line
Face value has much wider context and relevance for businesses than just a “back-of-the-envelope calculation,” in reality. Although the terms book value, fair value, face value, and market value may all sound similar, they have different meanings in the world of business. If you want to use the stock market as your main source of income, you should be familiar with many terms, including face value.
