What is Face Value In Stocks?

Face value is an important concept in the stock market, a very notable value in investing, through stocks and shares, as well as bonds. The share face value is very significant since it determines the financial ratios, metrics like EPS, P/E ratio, and ROE. It further determines the amount of capital raised by the company with its initial issuance of shares.

It is also a fact that the face value of a share usually does not have any relationship with its market value, which varies greatly over time with such market forces as supply and demand, corporate performance, and investors’ sentiment.

It’s important in the share market for several reasons: it helps to determine the current market value of the stock, calculates a premium, and is an important ingredient in the calculation of profit. Its interest rates help in calculating the same.

How Face Value Shapes Stock Prices?

When you start investing in stocks, understanding the share’s face value is essential. Also known as par value, this is the nominal value of a security set when the stock is issued, representing the stock’s original cost as listed on the certificate.

The face value of stocks and bonds is a key concept in the stock market. It is fixed when publicly traded companies offer stock through Initial Public Offerings (IPOs) and represents the price at which the company’s stock can be purchased.

Companies can also raise capital by issuing bonds, where face value—also known as par value—refers to its recorded value in financial records and share certificates. The face value is established when a company starts issuing shares and bonds.

Understanding The Significance Of Share Or Bond Certificates

Companies issue shares and bonds with a defined value known as Face Value, which is typically assigned by the corporation and influenced by various factors.

Share certificates are documents issued by companies that sell shares in the market, containing details such as face value, class of shares, issue dates, and more.

From the company’s perspective, face value assignment becomes crucial in calculating the accounting value of its share, that appears on the company’s balance sheet.

The face value of shares and bonds is specified clearly on the share or bond certificate, and investors need to know this before buying or selling stocks.

Formula:

The formula for calculating the face value of a stock, also called the “nominal value” or “par value,” is:

Face Value of a Share = Equity Share Capital / Outstanding Shares

Differences Between Face Value And Market Value.

Face Value	Market Value
The face value of a stock is its nominal value at the time of issuance.	The market value of a stock is its current price as quoted on the stock exchange.
The corporation sets the face value of shares and bonds.	Market value fluctuates based on the prices of equities traded on stock exchanges.
Face value is not affected by market conditions.	Market value can fluctuate based on macroeconomic data, government policies, and global events.
Face value is calculated by dividing equity share capital by the number of outstanding shares.	Market value is determined by multiplying the current stock price by the number of outstanding shares.

What is Book Value?

Book value is a term associated with the stock market wherein the values are face value and market value. It is that value which is represented for shares in the books of the company. To calculate the book value, divide the net value of the company by the number of shares issued.

Changing the Face Value of Stocks

Corporate action like a stock split decreases the face value of shares. More units and shares are put into the same number, but with a reduced face value due to a stock split.

If an example is taken where the face value of a share of any company stands at Rs 20, and that particular company declares a stock split of 1:1, then the one share would be bifurcated into two shares. And consequently, the face value of each of them would stand at Rs 10.

Frequently Asked Questions (FAQs)

How is a share’s face value determined?

Face value is calculated by dividing a company’s net value (assets minus liabilities) by the number of issued shares.

What is the face value of an initial public offering (IPO) share?

The face value of an IPO share is the fixed value set by the company at the time of issuance, known as par value or nominal value.

What is the minimum face value of a share?

The minimum face value of a share is set at Rs 1 by SEBI, though many companies have face values of Rs 10, Rs 100, or Rs 1.

Can the face value increase?

Yes, a company can increase the face value of shares by amending the Capital Clause of its Memorandum of Association without a shareholder vote.

How can the share’s face value be reduced?

The face value can be reduced by repaying shareholders, for example, reducing fully paid shares from Rs 100 to Rs 75.

What is a bond’s par value?

A bond’s par value is its face value, which is the amount stated in the corporate charter and is often very low or zero.

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