Many people get attracted or invest in the stock market to multiply their money and achieve their objectives. To get profitable returns from the market, it is necessary to have an excellent understanding of the prominent terms. One of the most important and standard terms frequently used is the ‘Face Value of a Stock’. What does this term actually mean? Why it is important? How to calculate it? You can see, this term alone is generating a few interesting questions in our mind. So, let’s start digging about the term ‘Face Value’ in great detail.
Face Value Meaning
Face value is also known as par value. It is the value of a company listed in its books and share certificates. The face value is decided by the company when it offers shares at the time of issuance.
How does the face value of share work?
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.
Importance of face value in stock market:
The face value of share is a useful component in the calculations of bonds and stocks, also used in the computation of payment of interest, market values, premiums and returns. It is very important to understand that face value of share has no relation with the market value of stock or price. Many a time people get confused between the two terms, therefore, let us know the prominent differences between the two terms.
Example: Let’s understand the importance of face value of share with the help of an example: Let us suppose a Company XYZ takes a decision of issuing bonds for the purpose of raising capital or funds.
The main objective of company XYZ is to raise Rs. 5 crore.
Now let’s say the face value of share of the company is Rs. 100, and the company shall issue 5, 00,000 bonds to meet its capital requirement.
If the company decides to pay 2% interest on the bonds, it means that it would be required to pay 2% interest on the face value of Rs. 100 each year. Therefore, the annual interest on the bond that is to be paid is 5, 00,000*2% i.e. Rs. 10,000 with Rs.100 as the face value.
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.
Differences between the face value of share and market value of shares:
Mostly, first time investors are a bit confused and are not able to find out the difference between face value of stock and market value of the stock. But both are very different as, face value of share always remains fixed and on the other hand, the market value is essentially the price which is listed on the stock exchange and that tends to change, fluctuate as per the market condition.