While starting with investing in the stock market, there are various terms that you would frequently hear from the very beginning; market price, book value and face value are some of the terms. Out of all these three, face value is probably one of the easiest to understand, although its understanding is essential for you as an investor.

What is Face Value of a Share?

Face value, or nominal value, of a share refers to the value at which the stock of a firm was initially offered. This value is determined by the concerned organization itself at the time of issuing shares, which normally happens during the initial public offering (IPO) of the company. It is a constant quantity and does not get affected by changes in the stock market. The face value of a share could be anything – it might be ₹10, but this very share can have its value in the market ranging between ₹500 and ₹1,000. In simpler terms, face value is the actual value of a share kept on record with the company.

The Difference Between Face Value and Market Value

Most novice investors tend to mistake face value for market value, but in reality, both of them are quite different from each other. While face value remains constant throughout the tenure of the share, market value changes every day based on many parameters. Face value depends on the company that issues stocks, whereas market value refers to the price at which you can buy or sell a particular share in the stock market.

Why is Face Value Important?

Although face value doesn’t tell you anything about the price of the share in the market, it is still a very important term in stock market investing. To begin with, face value serves as an important variable in calculating various financial ratios like EPS and ROE, which are useful in analyzing the company’s overall performance.

Secondly, it plays a very crucial role in determining dividend yields. In India, companies typically announce dividends based on the face value of shares. A 50 percent dividend on a ₹10 face value share will translate into ₹5 dividend per share. Finally, face value plays a very important role in determining the company’s share capital.

Importance of Face Value in IPOs

While issuing shares via IPO, the issuance price is always greater than face value. This difference between the issuance price and face value is termed as the premium. For instance, when a business firm issues shares of ₹10 face value for ₹100, then the amount of ₹90 is taken as the premium.

Stock Split and Bonus Issue

The face value is affected in the process of stock splits and bonus issues. A stock split involves reduction in face value and an increase in the number of shares. For example, if a stock of face value ₹10 is split into two, then the new face value will be ₹5 and there will be double shares than before. On the other hand, the process of a bonus issue involves issuing more shares depending upon the face value.

Does Face Value Influence Investment Decisions?

Face value doesn’t decide the quality of a particular stock. Rather, factors such as a business’s performance, earnings and growth prospects matter much more. Nonetheless, face value enables investors to gain insight into the structure of the firm’s capital and the workings of dividends as well as corporate actions.

Basics about Face Value for Better Investments

Face value is an essential concept which refers to the initial value assigned to a share by the firm. Although face value doesn’t affect the actual price at which shares are traded, it still has significance when it comes to calculating financial aspects, dividends and corporate actions. By knowing the definition of face value, investors can expand their knowledge regarding the basics of stock investing.

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FAQs

1. What is the face value of a share?

Face value is the original value of a share set by the company at the time of issuance. It remains constant and is used for accounting and financial purposes.

2. Is face value the same as market price?

No, face value is fixed, while market price changes based on demand, supply and company performance in the stock market.

3. Why is face value important for investors?

Face value is important because it is used to calculate dividends, financial ratios and the company’s share capital.

4. How does face value affect dividends?

Dividends are often declared as a percentage of face value. For example, a 100% dividend on a ₹10 face value share means ₹10 payout per share.

5. Can face value of a share change?

Yes, face value can change during corporate actions like stock splits, where the value is reduced and the number of shares increases proportionally