Face Value is a known term by the investors of stocks and bonds. If you’re new to the stock market or bond market, then this complete article is for you. Of course, the first thing to learn in the stock market journey is the face value or par value.
It is the nominal value of a share while it gets launched to the public through IPO (Initial Public Offering).
According to Statista Research Department, Indian companies raised more than 1.4 Trillion INR in public markets through initial public offerings (IPOs) in 2021.
Let’s look into the face value in more detail and how it corresponds to market value.
Face Value in Stock Market?
The face value (FV) of the stock or bond is the price it is listed on the stock market for public trade. It is also known as the par value, which refers to a security’s nominal or dollar value as indicated by its issuer.
The accounting value of a stock is calculated using the FV on a company’s balance sheet.
Face value is essential in the stock market for legal and accounting reasons. Earlier, a share certificate with the FV was given to the shareholder upon purchasing a stock. However, today all the securities are transferred through the DEMAT account.
Through an IPO (Initial Public Offering), a publicly listed company issues its stocks and sets the FV of each share.
Any stock issued by any company in India (listed under IPO) must be at least Re 1. Companies can give shares with the following face values: Re. 1, Rs. 2, Rs. 5, Rs. 10 (the most popular), or Rs 100.
Some common stocks traded in India have the following face values:
- Reliance Industries – Rs. 10
- Tata Consultancy Services (TCS) – Re. 1
- Infosys – Rs. 5
- ICICI Bank – Rs. 2
- HDFC Bank – Re. 1
- ITC – Re. 1
- MRF – Rs. 10
Key Takeaways:
- A stock’s nominal value or dollar value is defined by its face value, which is stated by the issuing party.
- A stock’s FV is its initial purchase price, as shown on its certificate; a bond’s FV is the amount that will be paid to the investor when the bond matures.
Importance of Face Value in Stock Market:
Face value is the point of focus in the stock market and is of utmost importance when investing or purchasing shares or bonds on the stock exchange.
The following traits reflect the significance of FV in the stock market:
- The premium amount can be calculated using face value.
- It plays a key role in calculating interest rates.
- It is used to calculate the stock’s current market value.
- Profit can be calculated using the FV of the shares.
For example,
If a company needs to raise Rs. 10 crores from the market to fund its business needs, it can issue 10 lakh bonds at Rs. 100 each. The company can calculate the various associated expenses, such as interest payments, using the fixed face value. If the company decides to pay 3% interest on its bonds, its yearly payment expense will be Rs. 30,000.
Benefits of Face Value:
A company offers a couple of advantages to long-term investors, like splits and dividends. The monetary benefits are calculated based on the FV.
Stock Split:
Normally, a share’s face value doesn’t change. The FV will decrease proportionately if the company chooses to raise the number of outstanding shares through a stock split (splitting one share into two or more).
For example, Stock A has an FV of Rs. 20 and a Market Value per share is Rs. 2000. The market value of each share will be Rs. 1000 if the company splits one share into two, and the FV will drop to Rs. 10.
If it splits one share into five, the market value of each share will be Rs. 200, while the FV will be Rs. 2.
A point to be noted is that the number of shares increases proportionally even though the shares’ face value and market value decrease.
Dividend:
A dividend is a benefit given to shareholders by a publicly listed company. When a company declares a bonus, it is paid out at FV rather than market value.
For example,
If a company announces a dividend equal to 100% of face value and a market price of Rs. 1000, that corresponds to a bonus of Rs. 20 per share.
Additionally, it would be best if you had a Demat account and dividend-paying stocks to be eligible for dividend payouts.
Where to Find the Face Value of a Stock?
The following are sources where you can find a company’s stock’s FV:
- Company’s Website
- Stock Exchange Websites, such as www.nseindia.com
- Finance-related Websites (e.g., Yahoo Finance, Moneycontrol, etc.)
Face Value vs Market Value vs Book Value:
Face value is important to a company. It is generally used to calculate interest on shares and bonds. Understanding the FV of shares is essential for making hassle-free investments or trades in the stock market.
Regarding stocks, it is crucial to understand that face value has no connection to market value. FV has the biggest impact on bond pricing.
Face Value = Equity Share Capital / Total Number of Outstanding Shares
The market value of a share is the rate at which it is traded on a publicly listed stock exchange. It represents a publicly listed company’s market capitalization.
For instance, if a stock trades at Rs 300 per share, that company’s market value per share is Rs 300. Due to its sensitivity to market fluctuations, it is quite volatile.
It can be calculated using the formula,
Market Value = Total Number of Outstanding Shares * Current Market Price Per Share.
Book value is the amount recorded for a share in the company’s records. It represents the amount per share that shareholders can get if the company is dissolved and its assets are sold to settle the liabilities.
It can be calculated using the formula,
Book Value = Company’s Total Assets – Company’s Total Liabilities.
When Does the Face Value Change?
Except in a stock split, a company’s face value remains constant. Shares are divided into additional shares during a stock split.
For example, if a company declares a 2-for-1 stock split, a shareholder holding one share would own two shares. The shares’ face value will also change in such a circumstance.
In this example, if the stock’s initial FV were Rs.100, the split would reduce it to Rs. 50. The objective of the stock split is to lower the stock price and make the shares more affordable for a wider range of investors.
How Does Face Value Affect Stock Market Decisions?
A company sells shares to common investors when it decides to raise money from the market.
Several rights are granted to investors holding the stock, including the eligibility to vote and the right to receive a bonus from the company’s profits.
There are two types of stocks:
- Common Stocks.
- Preferred Stocks.
Common Stocks:
Common stockholders are entitled to a share of the company’s assets and profits. As the company expands, the value of your investment rises as well.
However, if something goes wrong and the company’s value drops, you could lose all your invested amount.
Preferred Stocks:
Preferred stocks come with a fixed price and offer fixed returns. Whatever happens to the company’s profits, investors will get their money back when the stock matures and will continue to receive dividends.
It might be a better option for investors with a short-term investment vision who don’t want to retain common stocks for an extended period to recover from a fall in share price.
Conclusion:
You can understand your investments more clearly if you are familiar with the stock market’s face value.
Because corporate actions like stock splits and dividends depend on them, you must learn the terms to understand the possibilities and the effects of such actions on your investments.
Additionally, a thorough knowledge of the terms will ease your investment process and help you to get the most out of your stock market investment.