Face value is one of the most important financial metrics for investors in the world of finance and share investing. Face value may seem to be a simple financial metric, but it holds immense importance in the process of equity, accounting, dividend distribution and valuation of company shares. Face value is decided when a company issues bonds and shares. Face value is the nominal value of the share, which is mentioned on the share certificate. Understanding face value is essential not only for accountants and company executives, but also for retail investors, analysts, and finance students.
In this article, we will cover everything about face value, like what it is face value is, its definition, analysis and comparison with the current market price of the share.
What Is Face Value?
Face value: The value of the first shares and stocks issued by any company is called the face value. Face value is the original cost of the stock, which is listed on the share certificate. This means that the face value describes the nominal value or rupee value of any stock or bond.
The face value is also called the par value. The face value does not reflect the actual market value of a share, as the face value is the initial price of the share at which it can be bought or sold. The face value is determined by the company when they first issue their shares or raises capital by issuing bonds. The face value of the share is printed on the share certificates.
Bond Face value: A company can raise money by issuing bonds, at which time the company sets the face value (par value) for the bond. Face value is the amount that is paid to the bondholder on the maturity date, provided the bond issuer does not default. However, bonds sold in the secondary market fluctuate with interest rates.
Face Value of Share and Bond :
Companies issue shares and bonds with a defined value known as face value:
Face value and shares: The face value of a share is the nominal value of the stock that is specified by the company when it issues equity. The face value of a share is the nominal value of the stock specified by the company when issuing equity. The face value does not reflect the actual market value (price) of the share. The face value of shares is used as a percentage in share capital calculations, dividend declarations, stock splits and other corporate actions.
Face value and bonds: Some companies raise money by issuing bonds. Bonds come at a face value, which is the amount the issuer offers the bondholder at maturity. The bond face value is also called the par value. The bond may either carry an additional interest rate or the yield may be based solely on the increase in the face value at maturity below the original issue price.
For bonds, the resale price can be higher or lower than the par value, depending on current interest rates. Stock prices are much higher than their original par value because investor demand causes prices to rise.
Importance of Face Value :
Face value plays a vital role in determining the price of stocks, bonds, stock exchanges, and other investments in the stock market.
Face value determines the actual initial capital raised by the company at the time of issuing shares. It also plays a vital role in determining the financial ratios of companies, such as price-earnings ratio (PE ratio), earnings per share (EPS), and return on equity (ROE).
Face value is used by companies and shareholders to make certain financial decisions or corporate actions. Some of these actions are as follows:
- Bookkeeping and accounting: Face value helps in maintaining accurate financial records of the company. Face value determines the authorised, issued and paid-up capital of the company, which appears in the balance sheet.
- Dividend declaration: Face value also helps companies in dividend declarations, as companies often declare dividends based on a percentage of the face value of the share. This means if a company declares a 500% dividend on a share with a face value of ₹5, the shareholder gets ₹25 per share as per their holding pattern.
- Stock Splits: Face value becomes important, especially during events such as stock splits or bonus issues, where the face value decreases when the number of outstanding shares increases proportionately.
Formula and Example of Face Value:
Face value is the original cost of shares, which is determined when the company issues equity for the first time. It is the initial cost of a share of the company.
Face value is calculated by dividing the equity share capital of the company by the total number of shares issued by it.
Face value: Equity share capital / Total number of shares issued.
Here; Equity share capital means the total capital raised by the company through the issue of equity shares.
The total number of shares issued indicates the total number of shares issued by the company.
Example :
Suppose the equity share capital of ABC Ltd. Company is Rs 1 crore, and the company has issued 10 lakh equity shares, then the face value per share is Rs 10.
Face value: 1,00,00,000 / 10,00,000 = Rs 10
Face Value vs. Market Value :
The face value of stocks and bonds is not equal to the actual market value of the shares.
Face value is the nominal value of the share, which is determined by the company at the time of equity issuance. It does not fluctuate due to demand and supply or during any recession or depression. In simple words, market conditions do not affect face values. It fluctuates only at the time of stock splits or bonuses. Face value is calculated by dividing the equity share capital by the number of its issued and outstanding shares.
The market value is determined by demand and supply, economic trends and market conditions. These values are governed by the price at which investors are willing to buy and sell the security at a given time. Depending on market conditions, there may be very little correlation between face value and market value. Market value is calculated by multiplying the current stock price by the number of outstanding shares.
For example, the face value of a stock is Rs 10 per share, and the share price is now Rs 500 per share. Here, the share prices are higher than their face value. This is because of investor confidence, growth expectations, company growth and demand for the shares.
Does Face Value Matter to Investors?
Sometimes yes or sometimes no, face value is the nominal cost of the stock. For investors and analysts, face value is relevant only at the time of dividend payment calculations, any corporate action by the company or when reading financial statements. It does not help investors decide whether a stock is undervalued or overvalued. For that, you need to look at the price-to-earnings ratio (EPS), return on equity (ROE), debt levels and cash flows. However, for analysts, regulators and accountants, the book value remains a base input in many calculations.
The Conclusion
As we know, face value is a financial metric that is determined by the company during its equity issuance. It is printed on the company’s share certificate. Face value is also called the par value of the company. It helps in streamlining the company’s capital structure, accounting framework, splits and bonuses and also helps in dividend determination and calculation.
Face value is different from market value. Market value is the price based on demand and supply. In the case of bonds, face value refers to the amount that is paid by the issuer to the bondholder on the maturity date; however, similar to stocks, bond market prices may fluctuate when sold in the secondary market. So understand face value or market value, it will help you in making formative decisions in your investment journey.
Frequently Asked Questions
Does Face Value Affect Share Prices of the company?
No, the face value does not have a direct impact on share prices. The share price is determined by the company’s earnings growth, sector performance, investor sentiment, market conditions and news. But the face value of a company remains the same unless the company announces stock splits and consolidations.
Is Face Value the Same As Par Value?
Yes, of course, face value and par value are the same; face value is the value of a financial instrument when it is issued. The face value of a stock is set by the issuer when the stock is first issued. And the face value (par value) of a bond is the amount the issuer pays its bondholders at the time of maturity.
Can the face value become zero?
No, the face value cannot be zero as it is a positive number like 1,2,5 or 10, which is decided by the company at the time of issuing equity. At the time of a stock split, the face value decreases proportionately by the multiplier of the stock split. But It Can not Be Zero ok.
What is the face value of an initial public offering (IPO) share?
When a company issues an initial public offering (IPO), it sets a face value of shares, which is the fixed price of the shares set by the company (IPO). An initial public offering (IPO) is when a company raises capital for growth and expansion (IPO).