What is the Face Value of a share and What is the difference between face value and market value

If you want to start trading in stocks and securities, you must be aware of the myriad terminologies used in the stock markets. One such key concept is the face value (FV) of stocks and bonds.

Whenever a public listed company issues its shares through Initial Public Offering (IPO), it decides the face value. It is simply the price at which you buy the shares of a particular company. Similarly, a company can also choose to raise capital or funds by issuing bonds. These are also issued at face value.

Also known as As Par Value, face value is the value of the company as listed in its books and share certificates. This is decided by the company, once it decides to issue its shares and bonds. To start trading in the stock markets, you need to mandatorily open a demat account and a share trading account. Here you must remember to choose a reliable stockbroker, who can offer features like a free trading account.

Face value is the face value of the shares, i.e. their original cost as mentioned in the share certificate. It is just an accounting value which can be either Rs 1, Rs 2, Rs 5, Rs 10 or even Rs 100.

The concept of face value can be easily understood with the example of Initial Public Offering (IPO). For example, take the IPO of IRFC. The face value of a single share of IRFC is Rs 10. However, the issue price at which the shares are issued is Rs 25-26.

The difference between the issue price and the face value is the premium that the company is charging potential investors.

Issue Price = Face Value + Market Premium

While the face value can be an arbitrary number (which is Rs 10 for most shares), the premium over the face value is not arbitrary at all. It depends on the company’s growth potential and profits and sales figures.

What is face value in stock market?

Face value is the original cost of a stock and represents the denomination of shares, similar to currency notes.

Companies decide the face value of a share at the time of issuance, and this may be subject to change – higher or lower – later. When the face value changes, say from Rs 10 to Rs 2, it is called a stock split – a share of Rs 10 is divided into five shares of Rs 2. The opposite happens in case of consolidation of shares.

An investor may not be able to buy the shares at face value and may have to pay more. This is called the share premium. If a company issues shares of Rs 10 face value and an investor has to pay Rs 140 to buy it, the investor has paid Rs 130 as share premium.

How does the face value of shares and bonds work?

Working of Face Value in Hindi

All companies issue shares and bonds with a fixed value, also known as face value. There are no fixed criteria for deciding the face value of shares by a particular company. Usually, it is decided arbitrarily by the company. Assigning face value is important from the point of view of the company as it helps the entity to calculate the accounting value of its shares. This value is then used in its balance sheet.

The face value of shares and bonds is clearly mentioned in the share/bond certificate. To know about the face value of the shares, all you need to do is check your demat account. Knowing the face value of the shares is the most important step before you start trading in shares.

What is the importance of face value in stock markets?

Importance of Face Value in Hindi

Face value is an important parameter to calculate various key aspects related to shares and bonds. Face Value can help with:

  1. To calculate the market value of shares
  2. To calculate premium
  3. to calculate return
  4. To calculate the interest payment

You can understand the importance of face value of shares with the help of an example. If a company wants to raise Rs 10 crore from the market to meet its business requirements, it can offer 10 lakh bonds with a face value of Rs 100. The face value determined by the company will help in computing various associated expenses like interest payment. If the company has decided to pay 3% interest on its bonds, then its expenses for payment would be Rs 30,000 on an annual basis.

What are the uses of face value of a share?

Uses Of Face Value in Hindi

The face value of a share is taken into consideration when the company decides to go for a stock split or declares dividend.

stock split

Usually the face value of a stock remains constant. However, if the company decides to increase the number of outstanding shares by a stock split (i.e. by splitting one share into two or more), the face value will decrease proportionately.

For example, the market price per share of stock A is Rs 1000 and the face value is Rs 10. If the company splits one share in two, the market value per share will be Rs 500 and the face value will be reduced to Rs 5. This splits one share into five, then the market price per share would be Rs 200 and the face value would be Rs 2.

Note * Although the face value and market value of the shares decrease, the number of shares increases proportionately.

dividend

Similarly, when companies declare dividend, it is issued at face value instead of market value. If a company declares a dividend of 100 per cent of the face value with a face value of Rs 10 and a market value of Rs 1000, it means a dividend of Rs 20 per share.

What is the difference between face value and market value of a share?

Difference Between Market Value and Face Value in Hindi

Face value is the price at which the company is initially valued (before it is listed on the stock exchange). And after the company is listed, the price at which it trades on the stock market becomes the market value of the share.

The market value of the shares is determined by the market conditions, which is dynamic while the face value remains constant. When you multiply the outstanding shares by the market value, you get the market capitalization of the company.

Face Value = Equity Share Capital / Number of Shares Outstanding

Market Value = Current Stock Price * Number of Shares Outstanding

Face value seems more of a theoretical constant number.

Whereas market price is more about liquid and real numbers.

Difference Between Face Value and Market Value:

If you are a first time investor, you may get confused between face value and market value. Before starting trading in the stock markets, it is important to know the difference between face value and market value. You can see the chart below.

face value market value
is unaffected by market conditions It fluctuates according to market conditions. Changes in prices can be caused by changes in macroeconomic indicators, government policies and international events.
The price is decided by the company The price at which shares are traded on the stock exchanges. This will change once trading starts.
This is the face value of the stock at the time of issue This is the current price of the shares quoted in the stock exchange
It cannot be calculated as the face value is determined by the company The market value can be calculated by dividing the total value of the company in the market by the total number of shares issued.

What is the difference between face value and book value

Difference Between Book Value and Face Value in Hindi

face value vs book value

Understanding Book Value:

Book value is another concept, which is closely related to the face value and market value of shares. It simply means the value of the shares in the books of the company. It is calculated by dividing a company’s net worth or the difference between its assets and liabilities by the number of shares issued.

Book value reflects the residual value of the company if it were to sell all of its assets and pay off the liabilities. Meaning, book value helps you determine how much the shareholders will receive when the company closes its doors.

For example, 10 lakh shares issued by a company, at a face value of Rs 10 and the equity capital of the company is Rs 1 crore – face value (Rs 10) * outstanding shares (10 lakh).

And its total assets are Rs 20 crores, and total liabilities are Rs 5 crores.

To calculate the book value of a company, we need to take the total value of all its assets and subtract all the liabilities from that. That is, 20 crores – 5 crores.

So, Rs 15 crore would be the book value of the company. If you divide this by the outstanding shares (10 lakhs), you get the book value per share, which is Rs 150.

So when the company is closed, the shareholders will get Rs.150 per share.

How does the face value of a share work?

Working of Face Value in Hindi

In the case of bond investments throughout, the principal value is the debtor’s price at the maturity date, unless the bond issuer defaults. However, bonds issued on the secondary market differ on lending rates. For example, if inflation exceeds the issue price of the bond, the bond is offered at a discount rate. Conversely, if the price is less than the bond discount rate, the bond is issued at a hefty premium. Although the face value of a bond provides a guaranteed yield, the face value of a stock is usually a weak predictor of the real deal.

In face value and bonds, the face value of the bond is the amount that the lender pays to the bondholder after maturity. A sealant can either have a different interest rate. The profit may be based solely on the correction of less than the initial issue price and the face value on maturity.

Whereas in face value and stock shares, the total face value of all claims of the company shall be the valid capital that the organization is bound to hold. Only above and beyond money can be made available to shareholders in the form of dividends. Essentially, funds backing face value act as default reserves.

However, there is no such provision to list the firms with the face value in question. This gives companies the option of using relatively low values ​​to assess the scale of the fund. Let us now learn about the importance of face value.

What is the importance of face value?

Importance of Face Value in Hindi

Face value plays an important role in determining the current position of the company in the market. It is preferred for computing the actual value of interest on stocks, bonds and FDs. Ultimately, businesses found that if they fell short of their par value, they would never consider selling the shares too cheaply or to meet asset requirements. It is largely bound at face value.

Nowadays, businesses usually have a value equal to a penny or a fraction of a cent. Many markets now authorize companies to claim that their stock has no par value. In the modern era, face value is a piece of the tail reminiscent of the stock markets.

Face value is equally essential for young entrepreneurs who are starting to build a company. The capitalization target is easily adapted if the company sets a valuation for each stock that is distributed. The shares are exchanged at a premium higher than the fair market value, which will result in additional paid-up capital as expressed in the company’s book. While the varying market capitalization of securities has little effect on the accounts, there is an ethical duty of par value on the part of the firm to its owners. No shares can be sold below that price.

Can the face value of shares change?

Yes, the face value of the share is subject to change; It is dependent on the factors which are directly or indirectly affecting the face value. These factors are often referred to as corporate actions, market reaction, stock splits, or the scenario where it is discovered that the company splits the shares into two units of reserves that are at a lower price than what they previously held. considered low. As mentioned above, this is why it makes a huge difference.

The definitions of face value, market value and book value of a share must be clear to you by now. These three terms are different, and should not be confused when studying all the basics of a business and the face value of a stock.

The face value of shares can change due to corporate actions, such as stock splits. In the case of a stock split, the company splits the existing shares into units of lower face value. For example, if a company with a face value of Rs 20 per share has announced a stock split of 1:1, it means that an existing stock has now been converted into two units, each with a face value of 10. is Rs. A stock split is a measure to increase liquidity, and can help in realizing the true value of a company’s shares.

Face Value – FAQs

What is the minimum face value of a share?

Corporations are incorporated with a face value of Rs 10, while most of them are either Rs 100 or Rs 1. SEBI, which regulates the rules for listing a public limited company on a stock exchange, defines a minimum face value of Re 1.

Can the share split be less than Re 1?

No, a share split cannot happen if the current face value remains Rs. Usually stock splits are done to minimize the cost/value of a share to maximize liquidity.

Can the share price go below the face value?

In the case of such shares, the face value may exceed the present value. If the selling price is much less than the face value, it is sold at a discount or at a price below the face value, resulting in a lower selling price of the share.

Can companies issue shares at face value?

As per section 62(1), a company can issue and assign shares at face value irrespective of the net worth.

Can face value also be called present value?

For present value, you are talking about the actual value of the money you are sure to receive; With face value, you are talking about the amount of money you are earning as a product of its value to maturity. Face value is now the value of the object, regardless of the future.

Is dividend calculated on the basis of face value?

Dividend is always declared at the face value (FV) of the share, irrespective of its market value. The dividend rate is calculated as a percentage of the face value of the annual share.

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