Share market investments might get confusing if the basics are not revised. Before investing in shares, you must learn about the valuations and prices. It is very important to understand the importance of face value and market value of a share, to analyse the trends that affect the overall market situation. Understanding the key factors that influence them will give us insights on what makes them different from each other.
What is Face Value?
The face value, also known as the ‘par’ value, is the financial value assigned to a share or other financial holdings. It is the nominal price of the share that helps the company to keep track of their equities and shares capital.
For example, company ABC, issues 1500 shares for ₹100 each. Here, ₹100 represents the nominal value of the share. Shares are issued in order to raise the company’s share capital.
Although, a share can be issued in three other ways i.e., at par, at premium, and a discount.
Issued shares at a premium, means that the shares are sold at a price higher than the face value. For example, a share valued at ₹10 is issued at ₹20, that means the shares are issued at a premium of ₹10. It simply means that the valuation of the share in the market is higher than the price fixed by the company.
Shares issued at par imply when the share price is equal to its market value..
Issued shares at a discount, means that the market value of a share is lower than its face value. For example, a share issued at ₹8, instead of ₹10. This means that the share is offered at a discounted price of ₹2.
What is Market Value?
Market value is the company valuation in the market that influences the company’s share price. This is dependent on the demand and supply of the market. For example, a company XYZ was doing very well in the market. So each share of the company was sold at ₹50. After a few years, the company started facing backlash from the public and it went through a tough period. During the decline period, their share prices went down to ₹20.
Face value vs Market value
| Based on | Face value | Market value |
| Meaning | refers to the price of share | refers the overall market valuation of the company |
| Purpose | to increase share capital, calculation of dividend, etc | to make investment decisions |
| Influenced by | company decision | market fluctuations |
| Example | 100 shares issued at ₹20 each by the company | 100 shares of ₹20 each issued at ₹50 because of high demand |
How is the Value Determined?
The face value is determined by the decisions made by the company primarily by the board of directors. Such bodies are involved in making decisions regarding equity capital or accounting requirements for the company. A simple formula used by all companies to calculate face value of a share is:
Total equity share capital/ Total number of shares issued
The market value is determined with the aim of making decisions regarding future investments, possible growth, ongoing market trends and market presence. It is measured and calculated on the market demand and supply, that is why even a slight market movement results in price fluctuation. The market value of the share is the actual price a stock trades at, given a particular time.
Investors can also determine whether the stocks are undervalued or overvalued. It is done by comparing the intrinsic value, i.e., the estimated fair value of a stock based on valuation methods.
- The absolute valuation system calculates intrinsic value of a stock based on cashflow, dividends, growth, etc.
- The relative valuation system uses P/E or P/B ratios, EBITDA, etc., of a company against its peer or industry standards to reveal the intrinsic value.
If the market price is greater than the intrinsic value, investors have to pay more than what the stock is valued at, indicating overvaluation. However, if intrinsic value is greater than market price, it is a potential buying opportunity.
Does it Change Over Time?
The face value of a share may change as a consequence of management choice. But it is not sensitive to the constant market movement. It does not change frequently.
The market value is sensitive to the market volatility, as the valuations highly depend on demand and supply in the market. The market value changes quite often.
Role in Investment Decisions
The face value of a share assists the company in dividend calculation and maintains transparency in the accounting. Dividends are the profit expected by shareholders to earn from their shares. Thus, face value performs an important role in investing decisions.
The market value, on the other hand, shows the possible risk, comparison with other companies of the same sector, market share, etc., that helps the interested parties to understand and invest. Investors should research the share market basics, before investing to avoid investing mistakes.
Final Thoughts
In conclusion, it is evidently visible that market value is a wider concept compared to face value. The face value refers to the price fixed by the company while issuing shares. Whereas, Market value is the valuation of a company that provides the necessary lead to make investment decisions.
FAQs
It is relatively cheaper in price but not in the value it holds. Because low face value stocks tend to change in the near future, which in most cases, it falls.
Yes, it is possible to have market value lower than face value, because the price is generally fixed in case of face value, whereas the market value changes frequently due to changes in demand and supply.
The face value of a share only changes when the company decides. No market fluctuation affects the nominal price of a share.
Market value is usually higher than face value because the face value is just a nominal price fixed for the shares, while market value speaks of the overall valuation of the company in the market compared to companies of the same sector.
