Face Value of Share

What is Face Value?

The face value (or par value) of a share is the nominal value assigned to a single share of stock by the issuing company. It is the value of the share as stated in the company’s articles of association and is usually a very small amount, often just a few rupees.
The face value of a share does not have any bearing on the market value of the share, which is determined by supply and demand in the market. The market value of a share may be higher or lower than the face value, depending on various factors such as the company’s financial performance and the overall state of the stock market.
In some countries, companies are required to have a minimum face value for their shares, but in other countries there is no requirement for a minimum face value. In some cases, companies may issue shares with a face value of zero.
The face value of a share is not the same as the issue price, which is the price at which the share is sold when it is first issued. The issue price may be higher or lower than the face value, depending on various factors such as the company’s financial condition and the demand for the shares.

Importance of Face Value

The importance of face value should not be underestimated. It is considered for the following reasons:

  • Calculation of Dividend: Dividends on shares are announced based on their face value, not their current market value. Because of this, when a firm declares a dividend of 10%, it means 10% of the face value, and not 10% of the share price.
  • Calculation of market price: When a company’s shares are split or consolidated, the market price changes accordingly.
  • Calculation of premium: The premium for a share can be determined by deducting the face value from the issue price.
  • Calculation of Ratios: Face-value plays a major role in determining the amount of share capital and evaluating the performance of a company. It is used to calculate various ratios like Return on Equity, Return on Capital Employed, and other ratios which are useful for doing fundamental analysis.

Can Face Value of a Share Change?

Generally, the face value remains fixed. In some cases, the management may alter the face value of a share.

  • Stock Split: The face value of a share can change due to corporate actions like stock splits. For example, if a company with a face value of Rs 20 per share announces a 1:1 split, it means that one existing stock will now be divided into two units with respective face values of Rs 10 each. This is done to increase the liquidity and reveal the true worth of the company’s shares.
  • Consolidation (Reverse Stock-Split): A stock consolidation is the opposite of a stock split. It consolidates multiple shares proportionately to reduce liquidity and increase their face value, for example, 10 shares of Rs. 2 can be consolidated into one share of Rs. 20.
  • Reduction of Share Capital: If a company continues to incur losses, it may decrease the value of its shares to offset those losses.

End Your Confusions Now

You should now have a basic understanding of the face value of a share. There are also other terms associated with a share, such as market value, book value, and intrinsic value. Let’s take a more detailed look at each one.

  1. Market Value: Market value refers to the price at which an asset, such as a stock, bond, commodity, or real estate property, would trade in a competitive marketplace. It is determined by the forces of supply and demand, and can fluctuate over time based on a variety of factors, such as changes in economic conditions, company performance, or investor sentiment. The face value of a share is fixed, but the market value of the company can be higher than its face value – except for penny stocks.
  2. Book Value: Book value, also known as “carrying value” or “net asset value,” is the value of an asset as it is recorded on a company’s balance sheet. It represents the value of the asset after subtracting any accumulated depreciation, amortisation, or impairment charges. It’s important to note that book value is different from market value. Book value may not reflect the current market conditions, while market value is determined by current market conditions.
  3. Intrinsic Value: Intrinsic value refers to the inherent or true value of an asset, as opposed to its market value or book value. It is the value that an investor believes an asset is worth, based on an analysis of its underlying fundamentals such as earnings, dividends, and assets.

Final Words

The face value of a company’s stock is the price recorded in its books and is used to calculate dividends, market price, and premium. It does not reflect the current market value of the share, which generally exceeds the face value. Face value can be changed if a stock splits, consolidates or reduces its share capital. When analysing a company, it is important to consider other aspects such as market value, book value and intrinsic value in order to get an accurate assessment.
Remember that face value does not show the true worth of a company.

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