What is Face Value of Shares?
Introduction
Face value refers to a financial term used to describe the nominal value of the shares as stated by the issuer party or company. In other terms, face value is the original cost of the shares which is listed on the certificate. Face value is also called the “par value” of shares. A point should be noted here that the face value is not the same as the market value. There are many other factors that decide the market value of the shares.
Importance of Face Value
- Face value helps in determining the current market value of stocks.
- It plays a crucial role in calculating premiums.
- Face value also assists the process of calculating profits.
- It is an essential component in the calculation of interest rates also.
- The value is also useful in calculating returns.
Difference between Face Value and Market Value
It is seen that the new investors often get confused about the face value and market value of shares. It is very important to know the difference between both of them for being a successful investor.
| Parameters of Comparison | Face Value | Market Value |
|---|---|---|
| Meaning | It is the nominal value of the shares at the time of issuance. | It is the current price of the shares which is quoted on the stock exchange. |
| Price Fluctuations due to Market Conditions | Face value of the shares does not get affected by the market conditions. | The market value of the shares gets affected by the market conditions. For example, the price change can be occurred due to changes in macroeconomic indicators, government policies, and international events. |
| Price Determination | This value is decided by the company. | It is the price at which the company trades its Shares in the exchanges. That’s why it can change with the changes in the effect of prices of the equities that have been bought in the exchange. |
| Calculations | The numerical formula for calculating the face value of shares is given below: Equity Share Capital / Total Number of Outstanding Shares |
|
Difference between Face Value and Bond’s Price
Just like the market value, the bond price is also different from the face value of the shares. It can be understood with the help of the table given below:
| Parameters of Comparison | Face Value | Bond Price |
|---|---|---|
| Meaning | Face value is the nominal or dollar value of the shares that are stated by the issuer. | Bond price refers to the current worth or the value of the bond that is determined by discounting the future cash flow. |
| Change in Value | Generally, the face value of shares remains constant throughout. However, a company can change its face value through a stock split. | Initially, the face value is assigned to the bond price at the time of issuance but it slowly changes with time. |
| Relationship with Bond | The description of a bond is given on the basis of its face value. | The details of the bond are not specified as per its bond price since it can fluctuate. |
| Factors | The major factors that affect the face value are the time and rate of interest. | The factors that affect the bond price are the interest, credit given by the issuer of the bond, and the period of maturity. |
| Public’s View | There is not any effect of public opinion on the face value of the shares. | The bond price may or may not be affected by the impression of the organization among the public. |
| Predetermined or Not | Face value of the shares is predetermined by the company. | Bond price may vary with so many factors and it is not predetermined. |
Frequently Asked Questions (FAQs)
Q.1. What is the face value of an IPO share?
Ans. The face value of the IPO is the par value or nominal value that is determined by the company. Initial Public Offering (IPO) is the process by which a company raises the funds by issuing its shares in the primary market for the first time.
Q.2. How the companies can raise the face value of their share?
Ans. The companies can enhance the face value of the shares by passing a shareholder’s vote or changing the Capital Clause of the Memorandum of Association. If the company is engaged in public trading then the company must submit several forms to the Registrar of Companies and the Stock Exchange.
Q.3. Can a Company Change the Face Value of its Shares?
Ans. Yes, a company can change the face value of its shares by its actions like stock splits. In this case, the existing shares are divided into units with a lower face value. A stock split helps the companies in increasing their liquidity or cash flow and also realizes the true value of the shares.
Q.4. Why do the companies reduce the face value of their shares?
Ans. The companies reduce the face value of their shares to make them more marketable among new shareholders. The company uses this technique of splitting shares when the stock prices are too high.