When you read any stock market news, there’s often a lot of jargon that can be confusing. That’s where we come in – to help you understand the fundamental aspects of the stock market.
In this blog post, we aim to explain the basics of the Share Market, focusing on the topic of Face Value. So, what exactly is the face value, and why is it important? Let’s dive into the learning process.
Meaning of Face Value of Share
The face value of a share is essentially the company’s net worth at the initial share price on its debut in the stock market.
In simpler terms, face value is the value assigned to a share for buying or selling. If you check the current price of a company’s shares, you’ll notice it varies from the face value. This difference is a combination of accumulated interest or dividends since the price changed and any fees your broker charges for executing the trade.
Similarly, companies can raise funds by issuing bonds. Face value, also known as par value, refers to the value registered in a company’s records, physical/ digital and certificates. This face value is set up when a company starts releasing shares and bonds.
The formula of the face value is shown below:
|Face Value of a Share = Equity Share Capital / Outstanding Share Numbers
Let’s consider an example, a company has an Equity Share Capital of ₹10,00,000 and an Outstanding Share Number of 1,00,000 shares.
Using the above formula let’s substitute the value:
|Face Value of a Share = ₹10,00,000 / 1,00,000
Face Value of a Share = ₹10
What is the Importance of Face Value in the Share Market?
The significance of Face Value in the stock market is highlighted by several factors:
- It sets the stock’s present market value
- It aids in figuring out a premium
- It is used to calculate profit
- It’s necessary for determining interest rates
How is Face Value Different from Market Value?
There is a huge difference between face value and market value. Below are table shows a few of the differences:
|The initial value of a share set by the company
|The current price at which a share is traded in the market
|Fixed by the company upon issuance
|Fluctuates based on supply, demand, and market conditions
|Typically remains constant unless altered via stock split
|Constant changes due to market dynamics
|Significant for accounting and dividend calculations
|Critical for investment decisions and determining a stock’s worth
|Company’s accounting records
|Real-time market sentiment and investor perception
How is Face Value Affected Due to the Stock Split?
In the scenario of a stock split, the face value of a share changes. Let’s say a company implements a 2:1 stock split. This means each shareholder receives two shares for every one they previously owned, but the face value per share gets halved.
For instance, if a shareholder had one share with a face value of ₹10 before the split, after the 2:1 split, they’d have two shares, each with a face value of ₹5. The overall value owned remains the same, but the face value per share adjusts to accommodate the split.
How does Face Value Impact Dividends?
The face value plays a key role in calculating dividends as it serves as the basis for determining dividend rates. Dividends are usually declared as a percentage of the face value per share.
For example, if a company declares a dividend of 5% on a face value of ₹10, each shareholder will receive ₹0.50 per share (5% of ₹10) as a dividend.
So, the face value is crucial in setting the foundation for dividend calculations.
In conclusion, grasping concepts like face value is crucial for boosting your financial knowledge. It not only aids in understanding investments but also guides you on your financial journey.
Face value represents a share’s initial worth recorded on its certificate or in a company’s records. On the other hand, book value reflects a shareholder’s equity value as per the company’s accounting records.
Reducing face value means offering shares at a discount. This occurs when a company struggles or faces bankruptcy. Stocks trading below their face value often get delisted relatively quickly.
As per SEBI regulations, the minimum face value is ₹1. Therefore, it cannot be lower than ₹1 as it’s the minimum requirement for a public limited company to be listed on the stock exchange.