What is Face Value in Share Markets?

Investing in the stock market requires us to understand the stock market terminologies. One such terminology is Face Value. The face value of a share is the nominal value that is set by the company at the time of public issuance or IPOs. The face value of a share is calculated as total equity share capital divided by the total number of outstanding shares. The face value of a share remains constant until there is a situation of stock split where the face value of each share can change. The face value of a stock is the initial cost of the stock that is issued in the stock certificate. When a company submits their DRHP (Draft Red Herring Prospectus), to SEBI they specify the face value of the share. The face value is also known as par value.

Understanding Working of Face Value of Shares and Bonds

The face value of a share is decided by the company issuing the stocks and is categorically mentioned in all share certificates. If you want to check the face value of a share you have invested in, you can check it through the digital certificate issued for that share in your demat account.

Ideally, the objective of face value is completely for accounting purposes. It helps organisations evaluate the value of shares and is mentioned in the balance sheet. The face value has nothing to do with the market price of the share. The market price is determined based on various market factors surrounding the shares.

Face value for bonds is the amount paid to the bond investor at the time of maturity. In the case of bonds, the original value at which the bond was issued may increase over time and the final value which is paid to the investor is the face value of the bond.

Importance of Face Value in Stock Market

Apart from helping companies calculate their accounting value of shares, face value plays other critical roles in the stock market. Let us understand them:

• Dividends : The primary use of the face value of shares happens at the time of distributing dividends. Dividends are the profit distributed by a company to its shareholders. Depending on the face value of the share, a company calculates the dividend payout per cent.
• Stock Split : The face value of the share is taken into perspective at the time of stock split as well.
• Calculating Premiums : The face value of a share also helps in calculating the premium a company is charging at the time of issuance. The issue price equals face value + the premium amount the company is charging.

Difference between the Face value and Market value

Face Value in case of a stock split

When stock prices have increased, the Stock split is a corporate action that companies do when they are usually thriving, and their stock prices have increased. When the stock prices rise considerably, existing investors are delighted however, it becomes expensive for new buyers. Thus, the company may split the stocks and make them cheaper for individual investors. Whenever a company goes through a stock split situation, the face value of its share changes. If the face value of a share is Rs. 10 and the company has gone through a stock split of 1:1, then the face value will reduce to Rs. 5 per share. However, this does not mean a loss for existing investors. It simply means that the shareholder now has 2 shares instead of 1 of that specific company.

Importance of Face Value in Calculating Dividends

A Dividend is one of the most attractive prospects a long-term investor looks at before choosing a stock. The face value of a share plays a pivotal role in calculating the dividends that a company distributes. A dividend is part of the profit distributed by a company to its shareholders. Depending on the face value of the share, a company calculates the dividend payout.