What Is Face Value of a Share?
Face value is the original cost of its shares fixed by a company when it issues its shares. Every company mentions the face value, which is also called the par value, in the share certificates. Now that we have understood the face value of share meaning let’s try and understand its significance and whether a company can change the face value after it has been fixed and listed in its books.
Companies can choose to increase or decrease the face value of shares when they plan to split their stocks, consolidate businesses, or reduce their share capital, among other things. This can be done through procedures as prescribed by the Stock Exchange and Registrar of Companies. SEBI has set the minimum face value of a share to Re 1.
Importance of Face Value
How is the face value of any importance to a company and its stakeholders? It determines the volatility of the shares in the market after the issuance of the company’s IPO. For instance, Company A and Company B released an IPO to raise Rs 100 and they set a share price of Re 1 and Rs 10, respectively. Company A would then have 100 shares in the market; however, Company B would have merely 10 shares available in the market. It is also of essence in several ways such as:
Deducing Dividend: Face value is used to calculate the dividend given on shares not the market price that reflects the variations in the stock price depending on its demand and supply and other factors.
Calculating premium: Premium is calculated by deducting the face value from the issue price of a share.
Computing financial ratios: Face value helps estimate the amount of share capital thus aiding in computation of various ratios such as return on equity (RoE), return on capital employed (RoCE), etc.
How does face value differ from market value?
The face value meaning differs drastically from that of market value. The two mustn’t be confused. Market value refers to the price at which the share of a company is traded on in the stock exchange. This is the price that you see when you check a stock’s price on the BSE or any other exchange. As mentioned above, market value unlike face value of share changes constantly based on demand and supply of the shares.