Face value of share: What is the Significance of Face Value?
What is Face Value of share?
While investing in the stock market the first thing any investor looks for is the face value of the stocks. Oftentimes, it is also denoted as the par value that is decided whenever a stock is issued for the first time in the stock market.
With the help of face value, the minimum value of any security can be determined. When it comes to stocks ‘face value’ is a vernacular that addresses the indigenous cost of the stocks as listed in the certificate.
The face value of securities such as bonds and stocks is a basic concept in the stock market. The companies can raise funds and capital by issuing bonds. Whenever a company or publicly traded firm offers its stocks in the stock market through IPO or Initial Public Offerings, the face value of those stocks remains fixed.
If we look from the company’s point of view then assigning a face value is extremely important in order to calculate the accounting value of any company’s share. This number can be further displayed on the company’s balance sheet.
If the company is issuing a share or bond certificate then the face value of the shares or bonds will be mentioned in the same. Furthermore, as a stock market investor before you start investing in stocks, you will need to evaluate the face value of the shares.
What is the importance of the face value of share?
In the stock market, face value can be considered the center of attention and it has a very important significance when it comes to making an investment, buying shares, or bonds from the stock exchange. The following characteristics signify the importance of face value in the stock market:
- Face value can help in measuring the premium amount.
- It has a pivotal role in calculating interest rates.
- It can help you determine the present market value of the stocks.
- Companies can calculate their profit using the face value of the shares.
We will use an example to further enhance our understanding of face value when it comes to securities. Let us assume that a company named XYZ ltd. is willing to raise Rs. 20 crores for the development of its business. The company can present 10 lakh bonds with each bond having a face value of Rs. 200. This fixed face value released by the company itself can measure various financial expenditures including interest payments. If XYZ ltd. is willing to pay 2 percent interest on its bonds, then its annual expenditure on regular payouts will remain Rs. 400,000.
Modification of the Face Value of Stocks
Due to different corporate actions, the face value of a company can change. Whenever a company issues a stock split then the current company stocks are further divided into smaller units that have a comparatively low face value. For example, if ABC company with a share of Rs. 40 per head has announced a stock split of 1:1 then the current stock will be split into a total of two units and each share will have Rs. 20 as its face value.
What are the main differences between market value and face value of share?
| Basis | Face Value | Market Value |
| What is it? | Initial Price of the stock | Market Price of the stock |
| Volatility | Fixed by the company remains unaffected by market ups and downs | Very volatile as it gets affected by the ups and downs in the market |
What do you mean by face value?
Face value is a financial term that gets used to define the minimum value of any kind of security aforementioned by the company or issuer. In the case of stocks, their original value as mentioned in the certificate would be considered the face value. On the other hand, for bonds face value is the amount the holder will receive at the time of its maturity.
What is the formula of face value?
The formula of face value is the total capital of equity shares divided by the total number of outstanding shares.
What is the importance of face value?
Face value is very significant for the stock market as it helps in calculating the premiums, investments, returns, market value of the stocks, etc. Due to multiple corporate actions including stock split, the face value of stocks can change.
Why is the IPO price more than face value?
The issue price and face value of securities such as stocks have a significant difference because of various factors such as the likelihood of a company’s development and growth, the percentage of risk involved, the interest of the shareholders and investors, etc.
What is 10 face value of share?
10 face value of share means a share with the face value of Rs. 10 is currently being traded in the stock market at the price of Rs. 35 and the premium of the stock is Rs. 25. If the market value is equal to the face value of the company shares then the face value will be considered at par.