The face value of a share signifies the nominal value assigned to it by the issuing company, as specified in the share certificate. This value is determined at the discretion of the company and is often denoted in the range from Rs. 1 to higher denominations. While the face value holds importance in the company's internal accounting processes, it is crucial to note that it remains independent of the current market price of the share, which is dictated by market forces like demand and supply.
Share or bond certificate
Share and bond certificates are issued by companies with a set value called the face value. This is determined by several factors and is most commonly assigned by the company.
Face value, along with issue dates, class of shares, and other information, form part of the share certificates issued by companies selling shares in the stock market. From the perspective of a company, setting a face value is vital as it enables them to evaluate the cumulative value of the shares in their internal accounting. This face value of a share or bond is prominently marked on the certificate. For young investors in the market, understanding the face value of shares and bonds is a crucial part of stock trading.
Working of face value of shares
The face value holds significance in dividend calculations, where dividends are typically declaredas a percentage of the face value of shares. This fixed percentage provides a basis for determining the return on investment for shareholders. Additionally, corporate actions, such as stock splits or bonus issues, can influence the face value. Stock splits, for instance, are employed by companies to enhance the liquidity of their shares, making them more accessible to investors.
Furthermore, the face value holds a similar role. It represents the principal amount that will be repaid to the bondholder upon maturity. Similar to shares, the face value of a bond is crucial for calculating interest payments, which are often expressed as a percentage of the face value.
While the face value might not directly impact the market dynamics, it serves as a fundamental element in various financial calculations, regulatory compliance, and shareholder communications within the dynamic landscape of the stock market.
Importance of face value in stock markets
The face value of a share plays a significant role in the stock market for both companies and investors. Here are some key aspects highlighting its importance:
1. Bookkeeping and accounting
The face value is crucial for companies in maintaining accurate financial records. It helps in calculating the accounting value of the company's shares, providing a basis for financial statements and accounting practices.
2. Legal and regulatory compliance
Stock exchanges and regulatory authorities often use the face value as a reference point for various regulations and compliance requirements. It serves as a standardised measure for financial reporting and legal documentation.
3. Investor information
Investors use the face value as one of the indicators when analysing a stock. While it does not directly reflect the market value, it provides a starting point for understanding the company's financial structure and its commitment to shareholders.
4. Fixed dividend calculations
Face value is instrumental in determining dividends. Companies declare dividends as a percentage of the face value of shares. This fixed percentage allows investors to anticipate their dividend income based on their shareholding.
5. Corporate actions
Corporate actions such as mergers, acquisitions, or restructuring often involve adjustments to face values. Understanding these adjustments is essential for investors and analysts to make informed decisions during periods of corporate change.
Formula of face value
The formula for face value is straightforward:
Face value = Equity capital/ Outstanding shares
How does the face value of a share denote its worth?
When it comes to the financial market, shares are traded based on their market value. You need to know what a share is worth if you wish to purchase a company's shares, sell a company’s shares, or simply invest. The face value of a share does not assist investors with these aspects.
However, it does help investors make decisions when compared to a share’s market value. Unlike market value, intrinsic values enable investors to judge whether a share is under or overvalued and make investment decisions accordingly. Thus, even though the face value does not directly denote a share’s worth, it is undeniably a part of it.
Let us take a closer look at the significant differences between face value and market value.
Difference between face value and market value
Aspect |
Face Value |
Market Value |
Definition |
Nominal value set by the issuing company. |
Current price of a share in the open market. |
Constancy |
Generally, remains constant. |
Subject to constant fluctuations. |
Influence on Share Price |
Does not directly affect market price. |
Directly affects the market price. |
Purpose |
Used for accounting, regulatory compliance, and dividend calculations. |
Reflects the actual worth of a share at a given point in time. |
Corporate Actions |
Altered by corporate actions like stock splits or bonus issues. |
Continuously influenced by market demand, supply, and investor sentiment. |
Stability |
Stable and does not change frequently. |
Can change rapidly based on market dynamics. |
Face value example
Let us understand face value and market value with an example. Suppose company ‘XYZ’ has issued a bond whose face value is Rs. 100. If you purchase this bond, you are lending the company Rs. 100 in exchange for earning a fixed interest of 10% every year. Each year, until the bond matures, you will earn Rs. 10 based on the nominal value of the bond and the predetermined interest rate. When the bond completes the maturity period, you will also receive the principal amount of Rs. 100.
However, during all this time, the bond’s market value could go up or down depending on factors like changes in interest rates, the company’s future outlook, and net worth.
Face value in the case of a stock split
Let us now look at the face value in the event of a stock split:
1. Definition:
- A stock split involves dividing existing shares into multiple shares, effectively reducing the face value per share.
2. Purpose:
- Companies opt for stock splits to make shares more affordable and increase liquidity.
- Despite the reduction in face value per share, the overall market value may remain relatively stable.
3. Example:
- If a company with a face value of Rs. 10 undergoes a 2-for-1 stock split, each shareholder will receive two Rs. 5 face value shares for every Rs. 10 share held.
Importance of face value in calculating dividends
Let us understand the importance of face value while calculating dividends:
1. Dividend declaration:
- Dividends are often declared as a percentage of the face value of shares.
- Face value provides a fixed reference point for determining the dividend amount payable to shareholders.
2. Consistency in dividend payments:
- Using face value in dividend calculations ensures a consistent and predictable income for investors, as the percentage remains constant.
3. Investor income expectations:
- Investors rely on the face value to estimate their dividend income based on the number of shares they hold.
How does the face value of a share affect the stock market decisions?
Instead of directly influencing stock market decisions, the nominal value of a share majorly affects a company’s decisions in terms of accounting and dividends. It is an essential part of a company’s financial statements, including the balance sheet, and assists in dividend calculations. However, it does affect the stock market indirectly in several ways. For instance, there are regulatory requirements based on face value, like the minimum capital for stock exchanges. Additionally, the face value of shares also affects investor perceptions in terms of affordability. For investors, the face value of a share, combined with the actual market value, helps in making smart investment decisions.
How can the face value of a share influence your investment decisions?
The face value of a share influences investment decisions by helping estimate dividend income, as it can be calculated using the nominal value. In addition to this, the face value helps understand the effects of stock splits and corporate actions like mergers and bonus issues. Besides these, the face value of a share also impacts investor and market perception, affecting share affordability. While not directly affecting market prices, face value is crucial for informed financial analysis and decision-making.
Conclusion
The face value of shares in the stock market serves as a foundational element for various financial calculations, regulatory compliance, and investor decision-making. While it may not directly influence market dynamics, it provides essential information for understanding a company's financial structure and facilitating transparent communication between companies and their shareholders.
