What Is Face Value Of A Share

What Is Face Value Of A Share? – Unmask the Accounting Value of a Stock

Kunal, an IT professional working with Tata Consultancy Services, is surprised. He is a first time investor, and he has just discovered that the actual value of TCS share price is just ₹1 even as it is trading at ₹3200-odd levels. 

Are you surprised too? 

Don’t worry! We’ll clear the clouds. To understand how a stock is valued in the stock market, you need to get familiar with the concept of face value, market value, and book value. In the case of TCS, ₹1 is actually its face value per share, and ₹3200-odd is its market value per share.

Let’s dig deeper! 

OUTLINE

Face Value Meaning With Example

The face value is the nominal value of the shares, that is, their original cost, as mentioned in the share certificate. It is just an accounting value that could either be ₹1, ₹2, ₹5, ₹10, or even ₹100. 

The concept of face value can be easily understood with an example of an initial public offering (IPO). Take, for instance, IRFC IPO. The face value of a single share of IRFC is ₹10. However, the issue price at which the shares have been issued is ₹25-26. 

The difference between the issue price and the face value is the premium the company is charging from potential investors. 

Hence, Issue Price = Face Value + Market Premium 

While the face value could be an arbitrary number (which is ₹10 for most stocks), the premium over face value is not at all arbitrary. It depends on the company’s growth potential and profits and sales figures. 

After you have got a brief idea about the face value of share meaning with example, let’s move towards the other aspects in the article.

Uses Of Face Value Of A Share

The face value of a share is considered when the company decides to go for a stock split or announces a dividend.

Stock Split

Typically the face value of a share remains fixed. However, if the company decides to increase the number of outstanding shares by stock split (dividing one share into two or more), the face value will decrease in the same proportion. 

For example, the market value per share of Stock A is ₹1000 and Face Value ₹10. If the company splits one share into two, then the market value per share will come at ₹500, and face value will reduce to ₹5. If it splits one share into five, then market value per share will stand at ₹200 and the face value at ₹2. 

Note* Although the face value & market value of the shares reduces, the number of shares increases proportionally.

Dividend 

Similarly, when companies announce a dividend, it is issued against the face value rather than the market price. If a company with a face value of ₹10 and a market price of ₹1000 announces a dividend of 100 percent of the face value, it means a dividend of ₹20 per share. 

A dividend is a reward that is paid to the shareholders by a public listed company. And to be eligible for dividends payouts, you must have a demat account and invest in dividend-paying stocks. 

If you haven’t opened a demat account yet, now is the time to do it, click here and open your demat account in just 15 minutes.

Face Value Vs Market Value

The face value is the price at which the company is valued in the beginning (before it is listed in the stock market). And after the company is listed, the price at which it trades in the stock market becomes the market value of the share. 

The market value of the shares is decided as per the market conditions, which is dynamic while face value remains static. When you multiply the outstanding shares with the market value, you get the company’s market capitalization.

Face Value Vs Book Value 

Book value denotes the residual value of the company if it were to sell all its assets and pay liabilities. Meaning, book value helps you determine the total amount the shareholders would receive if the company shuts its doors.

  • For example, a company issued shares worth 10 lakh, at ₹10 face value, and the