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Face Value is the original cost of the share issued, mentioned in the share certificate when a company is listed on the stock exchange. It is also known as nominal value or par value. It is determined during the initial stages of the offering but does not denote the actual market value.
The Face Value does not change and stays constant unless the company goes in for a stock split or reverse stock split. When a stock split happens, the calculation is on the basis of the “face value” of the share, not its market value. For example, if the stock’s face value is Rs 10, and there is a 2:1 split, the face value of each share will change to Rs. 5. Accordingly, the market value also gets adjusted.
Stocks and bonds are some of the most common examples of instruments at face value. This value is decided by the entity that issues the instrument. So, in the case of stocks, the face value is determined by the company. The central bank decides the face value of bonds issued by the government through the Reserve Bank of India (RBI)
Importance of Face Value of a Share
Face value is a primary concept that remains important in shares, bonds, stock exchanges, and investments. It establishes the initial capital a company raises through the issuance of shares.
However, a share’s face value does not match its market value. The market dynamics of demand and supply, company performance, and investor perspective determine the market value of a share, subject to major fluctuations over time.
The following factors show the significance of Face Value in the share market:
- Dividends Calculation
Dividends are the profits given out by a company to its shareholders. The company calculates the dividend payout ratio percentage based on the face value of the share.
- Premium Calculation Process
The face value helps calculate the premium a company charges when issuing shares. Issue price = face value + the premium amount the company is charging.
- Stock Splits
The face value is reduced during a stock split while the total shares increase proportionally. For example, if a share with a face value of ₹10 undergoes a 5:1 stock split, the new face value becomes ₹2.
- Financial Ratio Analysis
A share’s face value is significant because it calculates financial ratios and measurements such as earnings per share, price-to-earnings (P/E) ratio, and return on equity (ROE).
Formula of Face Value
To determine a stock’s face value, divide the total equity capital by the number of outstanding shares.
The formula to calculate the face value of a share is:
Face Value = Equity Capital / Outstanding Shares
Here, Equity Capital is the total value of a company’s assets minus its liabilities.
Example of Face Value of a Share
The face value of a share changes due to corporate actions such as a stock split.
For example, a company divides its existing shares into units of a lower face value. Assume a company with a face value of Rs. 20 per share announces a stock split of 1:5. The face value of a share will drop to Rs. 4 (Rs. 20/5).
Again, you hold 100 company shares with a face value of Rs. 20 and a market value of Rs. 10,000. After the 1:5 stock split, you have 500 company shares, but the face value goes down to Rs. 4, and the share price falls proportionally to Rs. 2,000. Companies choose stock splits to increase their shares’s liquidity as investors think the share price is cheap.
Also Read: What is Buyback in Share Market: Why Companies Do it
Face Value vs Market Value
The table below explains that face value and market value significantly differ in the stock market.
| Point of Distinction | Face Value | Market Value |
| Definition | Face value is the stock’s nominal value at the time the stock is issued. | Market value is the current stock market price at which the stock is traded in the open market. |
| Calculations | Face Value = Equity Capital / Outstanding Shares | Market Value = Current Market Price × Total Number of Outstanding shares |
| Influence of Market Conditions | Does not get affected by market conditions | It can fluctuate depending on market conditions such as economic data, global events, and government policies. |
| Price Determination | It is set by the issuer at the time of issuance | It is determined by the prevailing market prices |
How Can Face Value of a Share Influence Your Investment Decisions?
If the company managers decide to raise money by selling shares, they sell their ownership stake to someone else, which means selling it to many individual investors. However, the company’s shares are only cost the same as the value of its assets divided by the total no. of shares.
The face value of shares is typically lesser than their market value. You will almost always pay (or receive) a different price from their face value while buying or selling a share. The face value of a share influences investment decisions by helping determine dividend income, as it can be calculated using the nominal value.
The face value of shares also helps explain corporate actions such as mergers, bonus issues, and stock splits. Although the face value does not directly affect market prices, it is important for informed financial analysis and decision-making. Moreover, it affects investor and market perception, impacting share affordability.
Conclusion
Face value is vital in financial calculations such as EPS, ROE, and P/E ratio. However, it does not always align with market value, which changes based on various market conditions. While it may not directly affect market dynamics, it provides crucial information about a company’s economic structure and encourages transparent communication between companies and their shareholders.
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