What do you mean by Face Value of a Share?
Ajay, an IT professional working with a reputed multinational company in Bengaluru, decided to invest in the share market. And hence, he downloaded a few apps on his smartphone that would have helped him to buy and sell shares online.
However, he was left shell-shocked when he checked that the original price of the shares of his company - which are currently trading at ₹3200 - is just ₹10.
Are you surprised as well?
Don’t worry! We will settle the dust. To understand how shares are valued in the share market, you need to become familiar with the concept of market value and the face value of shares. In the above example, the face value of the share is ₹10 whereas its market value is ₹3200. Let’s dig deeper into this!
What is the Face Value of a Share?
The face value of a share, also called the par value, refers to its original cost or price, as mentioned in the share certificate and company’s records. The face value of a share remains fixed and is decided by the issuing company at the time of its issue.
Whenever a company decides to go public and floats its Initial Public Offering (IPO), it determines the face value of its shares. It can be either ₹1, ₹2, ₹5, or ₹10. Mostly, Indian shares have a face value of ₹10.
Face Value vs Market Value
If you’re new to the share market, you can easily get confused between the market value and face value of shares. Therefore, knowing the difference between them is essential before you start trading in the stock market.
The face value of a share is the price determined by the company at the beginning, i.e., before it gets listed in the share market. Whereas, the price at which a share is currently being traded in the share market becomes its market value.
This difference in the market value and face value of shares occurs because of the fluctuations in their prices due to market conditions, Government policies, and national and international events. The market value of a share is dynamic while its face value remains static.
When the market value of a share is more than its face value, it is said to be at a premium or above par. Similarly, if the market value of a share is less than its face value, it is said to be at a discount or below par. And if the market value of a share is equal to its face value, it is said to be at par.
What is the Importance of the Face Value of Shares?
The face value of a share is important for legal and accounting reasons. It helps in calculating various key aspects of a particular share, such as:
- Market value
- Returns for a company
- Dividends or interest payments
When a company decides to share its annual profits with its shareholders, they issue dividends. And these dividends are declared as a percentage of the face value of a share and not the market value. For example, if a company – whose shares are currently trading at ₹100 and have a face value of ₹10 – decides to pay a 1% dividend to its investors, the dividend would be ₹1 and not ₹10.
The face value of a share also assumes significance when a company decides to split its shares. In the case of a stock split, the face value of the share also gets split in an equal proportion.
The face value of a share is its initial value determined at the beginning. It holds little significance while buying or selling shares in the share market. However, it becomes an important parameter while calculating dividends and the total net worth of a company.
Also Read: Share Market For Beginners
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Frequently Asked Questions
Yes. The face value of a share can change if the company decides to split its stocks. In such a case, the face of the share also gets split in an equal proportion. For example, if a stock with a face value of ₹10 gets split in the ratio of 1:5, its new face value would be ₹2.
No. As per the guidelines of the Securities and Exchange Board of India (SEBI), the minimum face value of a share can be ₹1. And hence, it cannot be less than this.
When a company decides to distribute its annual profits among the shareholders, they do it in the form of a dividend. Since this dividend is issued on the original price of the stock, it is calculated on the face value of a share and not its market value.