What is Face Value?
Face value is a financial term used to describe a security's nominal or dollar value, as stated by its issuer. The company decides the face value when it offers shares at the time of issuance. The face value of a share is fixed until the company decides to split or reverse-split the shares.
In bond investing, face value is paid to a bondholder at the maturity date, as long as the bond issuer doesn't default. However, bonds sold on the secondary market fluctuate with interest rates.
The face value of a share, also known as the par value, is the value at which a share is listed on the stock market. A stock market is a place that gives investors the potential to earn good returns. While investing in the markets, knowledge of stock market terms is essential. The first thing to understand is the face value of the share.
Face value is used to calculate the accounting value of a company's stock for a company's balance sheet. So, it is essential to remember that the face value has no relation to the prevailing stock price.
The importance of face value in the stock market is for legal and accounting reasons. Earlier, when a shareholder bought a stock, they were issued a share certificate that included the face value. Nowadays, however, all certificates are issued in a digital format. Mostly, shares of an Indian company have a face value of Rs 10.
NOTE: Face value describes the nominal value or dollar value of a security.
How to Calculate Face Value?
There are no fixed criteria for deciding on the face value of a stock. The face value is assigned by the company in an arbitrary manner and utilized to calculate the accounting value of the company's stock so that it can use in the balance sheet. It is either Rs. 1, Rs. 2, Rs. 5, or Rs. 10.
Face Value is calculated using equity share capital and the number of shares outstanding.
Face Value = Equity share capital / Number of shares outstanding
Meanwhile, the stock's face value should not be confused with the issue price of the stock. The issue price consists of an added premium over and above the face value that a company asks of their potential subscribers. So, the issue price = face value + premium.
The premium is not something that is decided at random. It depends on the various performance metrics of the company, such as sales, profit, and volume growth. It is observed that a company offers an issue price that is closer to the face value, which means that the company has asked for a minimal premium from its investors.
For example, a pharma company has come out with an IPO. It is offering 10,000 shares with a face value of Rs. 10 each. Further, the issue price is Rs. 150. Here, it is asking its potential subscribers to pay the company a premium of Rs. 140, which is over and above its face value of Rs. 10.
Face Value and Bonds
A bond face value is an amount the issuer provides to the bondholder once maturity is reached. A bond may have an additional interest rate, or the profit may be based solely on the increase from a below-par original issue price and the face value at maturity.
Face Value and Stock Shares
The cumulative face value of the entirety of a company's stock shares designates the legal capital a corporation is obligated to maintain. In essence, the funds that cover the face value function as a type of default reserve.
However, there is no requirement dictating the face value businesses must list upon the issue. This affords businesses the leeway to use very low values to determine the size of the reserve.
Importance of Face Value in Stock Markets
The face value is a helpful component in calculating bonds and stocks and computes payment of interest, market values, premiums, and returns. However, it is essential to understand that the face value has no relation with the market value of stock or price.
Face value is an essential parameter for calculating various key aspects concerning shares and bonds. Face value can help to:
For 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 fixed by the company will help it calculate the various associated expenditures, like interest payments. For example, if the company has decided to pay 3% interest on its bonds, its expenditure towards payouts will be Rs Rs 30,000 annually.
Face Value in Case of Stock Split
When a company decides to split its stock, then it is based on the face value. A stock split is nothing but a division of the face value, so in the case of a 1:5 split, shares that had a face value of Rs 10 would be reduced to the face value of Rs 2.
However, the price of the shares would also fall proportionately. Hence, the total amount of your holdings will remain the same. In effect, more shares will be available for investors.
Importance of Face Value in Calculating Dividends
When a company distributes a part of its annual profits among its shareholders, it is known as a dividend. Therefore, the Face value of a share is essential in the calculation of dividends. Therefore, as an investor, it is important to see the face value to calculate dividends.
For example, a share is trading in the market at Rs 100 but has a face value of 10. So when it announces a dividend of 10 percent, then Rs 1 is the dividend and not Rs 10.
The book value of a company theoretically means the total value of the company's assets that shareholders will receive if the company gets liquidated, i.e., when all company's assets get sold. All the liabilities are paid back to all the debt-holders. Therefore, book value can be considered as the net value of the company reflected in its books.
The book value is calculated as total assets minus intangible assets (patents, goodwill) and liabilities. Thus, you will get the book value per share when you divide a company's book value by the total number of outstanding shares.
You can compare the book value per share of a company with its market price to determine whether it is undervalued. Further, it's always advisable to invest in companies with a growing book value over time.
Market value per share is the current value of the stock. This is the price at which the market values the stock. The market value per share of a company fluctuates continuously throughout the trading period.
Further, the total market value of a company, also referred to as the public company's market capital is calculated by multiplying the company's current share price by its total outstanding shares.
Difference between Face Value and Market Value
The face value and market value are very similar, so that you can get confused between the face value and market value. Knowing the difference between the face value and market value is important before starting trade in stock markets. Here are some differences between them: