Face value of a share, also known as the par value, is the value at which a share is listed on the stock market
A stock market is a place that gives investors the potential to earn good returns. While investing in the markets, knowledge of stock market terms is essential. The first thing to understand is the face value of the share. It is also known as the par value and is decided when the stock is issued. An essential feature of the face value is it is fixed, and it never changes.
Now, that we have looked at face value of the share meaning, we will see how it is determined. It is not calculated but instead assigned arbitrarily. Face value is used to calculate the accounting value of a company’s stock for a company’s balance sheet. So, it is essential to remember that the face value has no relation to the prevailing stock price.
The importance of face value in stock market is for legal and accounting reasons. Earlier, when a shareholder bought a stock, they were issued a share certificate which included the face value. Nowadays, however, all certificates are issued in a digital format. Mostly, shares of an Indian company have a face value of Rs 10.
Difference between Face Value and Market Value
Many first time investors may be confused by the difference between the face value of stock and its market value. Market value is the current price at which a share is sold or bought in the capital markets. Mostly the face value of a share is less than the market value. The market value of a company changes based on its performance and demand and supply of its stock. Let us say that a company goes public at face value of Rs 10. It may have a market value of Rs 50. However, that is not always the case. In case of certain stocks, the face value may be higher than the market value.
A share is said to be at a premium or above par when its market value is more than its face value like the above example. If a stock with a face value of Rs 10 is selling at Rs 25, it is at a premium of Rs 15. It is known to be at par if the market value equals the face value. If the market value is less than the face value, it is selling at a discount or below par. For example, if a share with a face value of Rs 100 is selling for Rs 50, it is at a discount of Rs 50.
Importance of face value in calculating dividends
When a company distributes a part of its annual profits among its shareholders, it is known as a dividend. The Face value of a share assumes importance in the calculation of dividends. This is why as an investor it is important to see the face value of a stock to calculate dividends.
Let us understand with an example. Let us say that a share is trading in the market at Rs 100 but has a face value of 10. When it announces a dividend of 10 percent, then Rs 1 is the dividend and not Rs 10.
Face value in case of a stock split
When a company decides to split its stock, then it is based on the face value. It is also essential to understand what happens to the face value of a share in case of stock split. A stock split is nothing but a division of the face value, so in case of a 1:5 split, shares which had a face value of Rs 10 would be reduced to the face value of Rs 2. However, the price of the shares would also fall proportionately. Hence, the total amount of your holdings will remain the same. In effect, more shares will be available for investors.
It is thus important to understand the face value of share meaning and how it is different from the market value when investing in the stock markets.
How does face value influence the stock market decisions?
When a company decides to raise capital from the market, they sell shares to general investors. The stock gives investors several rights, including the right to vote and eligibility to receive dividends from the company’s profit.
There are two types of stocks – common and preferred.
Investors of common stocks have a claim on the company’s assets and profit. As the company grows, the worth of your investment also increases. But there are also chances that you may lose your entire investment if things go wrong and the company loses value.
Preferred stocks have a fixed price and pay fixed returns. No matter what happens to the company’s profit, investors will get their investment back when the share matures and continue to receive dividends.
Preferred stocks may be a better choice for investors with a short-term investment horizon who don’t want to hold common stocks long enough to overcome the dip in share price.
How can face value influence your investment decision?
A company’s share price is determined by dividing the company’s assets by the number of shares. The face value of a stock is usually less than its market value – usually by 1 percent. So, the price you pay or receive if selling differs from the stock’s face value.
The market value represents how the company’s assets are worth in the financial market according to the market participants. It usually reflects the market capitalization value of the company, calculated by multiplying the number of shares in circulation by their current market price.
The market value represents investors’ interest in the company’s shares.
The difference between market price and face value is the ‘par value’. The par value doesn’t influence investment decisions in the market. It is a number chosen at random when the company was formed.
If you don’t want to invest directly in stocks, mutual funds and index funds are other options.
Index funds are mutual funds that try to match the performance of primary market indices, like the S&P500. Index funds are two types – total market index funds and broad-based index funds – based on their selection of indexes. The broad-based index funds include SME stocks, which Total market index funds don’t.