Face value of a share represents the nominal or par value assigned to a company’s stock, as determined by the issuing company. It is the minimum price at which the share can be issued and is usually a small fixed amount, such as ₹10 or ₹5 per share. The face value is distinct from the intrinsic value or market value of the share, which can be higher or lower based on the company’s financial performance and investor demand.
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Face Value Meaning
Face value of a share represents the nominal or par value assigned to a company’s stock, as determined by the issuing company. It is the minimum price at which the share can be issued and is usually a small fixed amount, such as ₹10 or ₹5 per share.
The face value is distinct from the intrinsic value or market value of the share, which can be higher or lower based on the company’s financial performance and investor demand. It is an accounting concept used to record the par value of a company’s issued shares in its financial statements.
Face value is an important consideration in calculating a company’s authorized share capital and paid-up capital. It also plays a role in determining the amount of dividends and other payments made to shareholders, as these are typically calculated as a percentage of the face value.
Face Value Example
Let’s consider the example of a company that has issued 10 million shares with a face value of ₹10 per share. This means the total authorized share capital of the company is ₹100 million (10 million shares x ₹10 per share).
If the company has successfully issued and allotted 8 million of these shares, the paid-up capital would be ₹80 million (8 million shares x ₹10 per share). The remaining 2 million shares would be unissued and considered part of the authorized but unissued share capital.
The face value of ₹10 per share is the fixed, nominal value assigned to the company’s stock, regardless of its current market price or intrinsic value, which may be higher or lower based on the company’s financial performance and other factors.
Face Value Formula
The formula to calculate the face value of a share is:
Face Value = Total Authorized Share Capital / Total Number of Authorized Shares
For example, if a company has an authorized share capital of ₹100 million and has 10 million authorized shares, the face value of each share would be:
Face Value = ₹100 million / 10 million shares = ₹10 per share
This formula is used to determine the par value assigned to the company’s shares, which is then reflected in the company’s financial statements and other corporate documents.
How To Calculate Face Value Of A Share?
To calculate the face value of a share, you need to know the company’s authorized share capital and the total number of authorized shares. The face value is simply the authorized share capital divided by the total authorized shares.
For instance, if a company has an authorized share capital of ₹500 million and has issued 50 million shares, the face value of each share would be:
Face Value = Authorized Share Capital / Total Authorized Shares
Face Value = ₹500 million / 50 million shares = ₹10 per share
The face value remains constant unless the company decides to split or consolidate its shares, which would require a recalculation of the face value.
Face Value Vs Book Value
The main difference between face value and book value is that face value is the original cost of a stock as listed on the certificate, while book value is the net asset value of the company calculated from its financial statements.
| Aspect | Face Value | Book Value |
| Definition | The original value of a stock or bond as stated on the certificate. | The net asset value of a company calculated from its financials. |
| Calculation | Fixed and stated on the stock certificate when issued. | Calculated as total assets minus total liabilities, divided by shares outstanding. |
| Purpose | Used mainly for legal purposes, such as calculating dividends or par value of bonds. | Used to assess the company’s current financial worth on the balance sheet. |
| Changes | Does not change unless the company undergoes actions like stock splits. | Can fluctuate based on changes in assets and liabilities. |
| Relevance to Investors | Generally less relevant for investment decisions. | Important for evaluating the company’s value and investment potential. |
Face Value Vs Market Value
The main difference between face value and market value is that face value is the original cost of a security as stated on the certificate, whereas market value is the current trading price of the security on the stock market.
| Aspect | Face Value | Market Value |
| Definition | The original cost of a stock or bond as stated on the certificate. | The current trading price of a stock or bond on the stock market. |
| Calculation | Fixed and stated at the time of issue. | Determined by the supply and demand dynamics in the market. |
| Purpose | Used to determine legal attributes like dividend calculations. | Reflects the current perceived value and performance of the security. |
| Fluctuation | Remains constant, does not change over time. | Changes frequently, influenced by market conditions and sentiment. |
| Investor Relevance | Important for understanding nominal values and corporate actions. | Crucial for making buying, selling, and investment strategy decisions. |
Importance Of Face Value
The main importance of face value lies in its role in calculating dividends and interest payments. It is a key factor in determining the par value of bonds and the base amount on which dividend payments on stocks are calculated, essential for financial transactions.
- Dividend Calculation: Face value is crucial for calculating dividends. It serves as the base amount on which dividends are calculated, typically expressed as a percentage of this value, guiding corporations in distributing profits to shareholders.
- Interest Payments: For bonds, the face value is used to calculate interest payments. The coupon rate applied to the face value determines the periodic payout to bondholders, making it fundamental for income-focused investors.
- Bond Pricing: When issuing bonds, the face value represents the amount that will be returned to the bondholder at maturity. This nominal value helps investors understand what they will receive back, influencing their investment decisions.
- Corporate Actions: Face value is used in various corporate actions, including stock splits and reverse splits. Changes to the face value can alter the number of outstanding shares, affecting the stock price proportionally and shareholder equity.
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Face Value Meaning – Quick Summary
- Face value is the nominal or par value of a share set by the issuing company, often a small amount like ₹10, representing the minimum price at which shares can be issued.
- Using a company with 10 million shares at a ₹10 face value as an example, the authorized capital is ₹100 million, with ₹80 million paid-up from 8 million issued shares. The face value remains constant, independent of market fluctuations.
- The formula to calculate face value is dividing the total authorized share capital by the total number of authorized shares, giving a fixed nominal value that is reflected in the company’s financial documents.
- To determine face value, divide the authorized share capital by the total number of shares. For example, ₹500 million capital and 50 million shares result in a face value of ₹10 per share, constant unless shares are split or consolidated.
- The main difference between face value and book value is that face value is the original stock cost, while book value represents the company’s net assets divided by the outstanding shares.
- The main difference between face value and market value is that face value is the original price on the stock certificate, while market value fluctuates and is determined by the stock market.
- The main importance of face value is in its use for calculating dividends and interest payments on stocks and bonds, serving as a base for these financial calculations and transactions.
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What Is Face Value Of A Share – FAQs
In the stock market, the face value of a share represents the nominal or par value assigned by the issuing company, which is the minimum price at which the share can be issued. It is an accounting concept distinct from the share’s market price or intrinsic value.
To calculate the face value of a share, you divide the company’s authorized share capital by the total number of authorized shares. For example, if a company has ₹100 million in authorized capital and 10 million shares, the face value is ₹10 per share.
The main difference is that share price is the current trading price of the stock in the market, which fluctuates based on various factors, while face value is the fixed, nominal value assigned by the company when issuing the shares, which rarely changes.
A higher face value is neither inherently good nor bad. It is simply an accounting convention that reflects the nominal value of the shares. What matters more is the company’s financial performance, growth prospects, and the market’s perception of its intrinsic value.
The share’s face value can be reduced through a stock split, where the company divides the existing shares into a larger number of shares with a lower face value, or a share consolidation, where the company combines existing shares into a smaller number of shares with a higher face value.
Disclaimer: The above article is written for educational purposes and the companies’ data mentioned in the article may change with respect to time. The securities quoted are exemplary and are not recommendatory.
