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!
- Face value meaning with example
- Uses of face value
- Face value vs market value
- Face value vs book value
- Quick Summary
- FAQ(Frequently Asked Questions)
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.
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.
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 company’s equity capital stands at ₹1 crore — face value (Rs 10) * outstanding shares (10 lakh).
- And it has total assets of ₹20 crore and total liabilities worth ₹5 crore.
To calculate a company’s book value, we need to take the aggregate value of all its assets and deduct all the liabilities from it. i.e. 20 crore – 5 crore.
So, ₹15 crore will be the company’s book value. If you divide it with the outstanding shares (10 lakhs), you get the book value per share, which is ₹150.
So when the company shuts down, shareholders will get Rs. 150 per share.
- 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 face value of a share is considered when the company decides to go for a stock split or announces a dividend.
- The face value is the price at which the company is valued in the beginning. The market value is its current price as per its future growth prospects and past financials. And the book value reflects the residual capital available to shareholders if the company liquidates itself on a given day.
FAQ(Frequently Asked Questions)
1. Can Face Value Of Share Be Less Than 1?
The Securities and Exchange Board of India (SEBI), which is the regulating body for listings of public limited companies on the stock market has set the minimum Face Value of a Share to be Re.1.
2. Why Dividend Is Paid On Face Value?
The dividends are the part of the annual profit which is distributed among the shareholders. This annual profit is calculated as per the face value of the share and not the market value.