When you start investing in stocks, the first thing to comprehend is the share’s face value in the stock market. It is also referred to as the par value, and it’s determined at the time the stock is issued.
In the stock market, Face Value is a financial term used to describe the nominal value of a security. In the case of stocks, Face Value is a jargon standing for the stock's original cost, as listed in the certificate.
The face value of stocks and bonds is a fundamental stock market concept. The face value is fixed when publicly traded firms offer stock through Initial Public Offerings (IPOs). It refers to the price at which a company’s stock can be bought.
Similarly, a firm can raise capital or funds by issuing bonds. Face value is also called the par value, referring to its value as recorded in its book/digital records and share certificates. The Face Value is set up when a firm initiates issuing shares and bonds.
Share or Bond Certificate
Companies issue shares and bonds with a defined value known as face value. Various factors determine the face value of a company’s shares. In most cases, the corporation assigns it.
Share certificates; are the documents issued by companies that sell shares in the share market. The share or bond certificate contains the Face value, class of shares, issue dates, and more on the shares of a company.
From the firm's standpoint, assigning face value is essential, allowing the organization to compute the accounting value of its shares. This number is further utilized in the company’s balance sheet.
The face value of the shares and bonds is clearly stated on the share/bond certificate. Furthermore, for an investor to begin trading stocks, it is necessary to determine the face value of the shares.
Importance of Face Value
Face value stands as a focal point in the stock market. The Face Value withholds a high significance around investing, the stock exchanges, shares, and bonds.
A share's face value is significant because it is used to determine financial ratios and measures like earnings per share (EPS), price-to-earnings (P/E) ratio, and return on equity (ROE). It also determines the company's initial capital raised by issuing shares.
However, the face value of a share does not always correspond to its market value. A share's market value is governed by market forces like supply and demand, corporate performance, and investor outlook, and it can change dramatically over time.
The following factors portray the importance of Face Value in the share market.
- Face Value determines the stock’s current market value.
- It assists in the process of calculating a premium.
- It plays a vital role in calculating profits.
- It is essential to calculate interest rates.
Formula of Face Value
The formula for the face value of a stock, also known as the "nominal value" or "par value," can be given as-
Face Value of a Share = Equity Share Capital / Outstanding Share Numbers
Difference Between the Face value and Market value
As elaborated in the table below, face Value and Market Value have significant differences in the stock market.
Particulars | Face Value | Market Value |
Meaning | It is the stock’s nominal value at the time of issuance. | It is the current stock market price as quoted on the stock exchange. |
Price Determination | The corporation determines the pricing of share and bond face value. | Market value changes due to the prices of the equities purchased in stock exchanges. |
Price Fluctuations | Market conditions do not affect Face Value. | Depending on market conditions, the market value can fluctuate. Price fluctuations can occur due to changes in macroeconomic data, government policies, and global events. |
Calculations | Face value equals the equity share capital divided by the number of outstanding shares. | Market value is calculated by multiplying the current stock price by the number of outstanding shares. |
Book Value: Book value is a similar stock market terminology closely related to Face Value and Market Value. It refers to the value of the company’s shares on its books. Book Value is calculated when the company’s net value, or the difference between its assets and liabilities, is divided by the number of issued shares.
Modifying the Face Value of Stocks
Corporate actions, such as stock splits, can modify the face value of shares. When a firm splits its stock, it divides the current shares into smaller units with lower face values.
Example: If a corporation with a face value of Rs 20 per share announces a 1:1 stock split, one current stock will be split into two units, each with a face value of Rs 10.
