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An Initial Public Offering (IPO) marks a critical juncture for a private enterprise, signifying its transition to a publicly traded entity. This occurs within the primary market, where the issuing company offers shares directly to investors.
The company sets a predetermined price band during an IPO, a range within which investors must purchase the shares. This is where the term ‘face value’ comes in. It’s the nominal value assigned to each share by the company. Face value serves as the base price, and it remains constant.
Consider an investor who buys 200 XYZ Corp. shares at its IPO for Rs. 10. As the business joins the stock market, it spends Rs. 2000. After XYZ Corp goes public, share prices may change. The investor will earn if the market value surpasses the face value of Rs. 10.
What is face value of share?
Face value, also known as ‘par value,’ is the fixed worth of a share determined by the company when it’s first issued. The face value of the share formula is:
Face value = Equity share capital / Number of shares outstanding.
Face value is an accounting tool. It helps companies make sense of their share capital for the books and keeps things transparent on the balance sheet.
Like shares, bonds have a face value. It’s the lump sum you’ll get back when the bond matures. But unlike shares, the face value of bonds can sometimes grow over time, depending on the terms of the bond.
Premium, par, and discount
- “At a premium”, a stock is said to be when its market value is greater than its face value. For instance, if a stock has a face value of Rs. 10 and is currently trading at Rs. 25, it is considered to be trading at a premium of Rs. 15.
- In contrast, when a stock’s market value equals its face value, it’s considered “at par.”
- The term “at a discount” describes a stock with a lower market value than face value. A discount of Rs. 50 is represented, for instance, by a stock trading at Rs.50 when its face value is Rs.100.
Importance of face value in stock market
Dividends: Dividends represent your portion of the company’s earnings. These are often calculated based on the face value of your shares.
You may also like: A guide to stock dividend
Stock split: A company may decide to increase its number of outstanding shares by executing a stock split. This will proportionally decrease the face value of each share.
Premium: Face value also helps calculate the premium a company charges during issuance. The issue price or the floor price is the sum of the face value and the premium charged.
The premium reflects investor sentiment. If investors are willing to pay more than the par or face value for each share it typically indicates positive prospects for the company.
Therefore when calculating your investment returns or gains keep this formula in mind;
Issue price = Face value + market premium.
Difference between market value and face value of stock
|The initial value of a stock when it is first issued.
|The current selling or buying price on the stock market.
|Impact of market conditions
|Unaffected by market ups and downs.
|Can change frequently due to market conditions.
|Decided by the issuing company.
|Decided by supply and demand in the market.
|Equity share capital divided by the number of outstanding shares.
|Current stock price multiplied by the number of outstanding shares.
A stock’s market value is typically more than its face value.
As a simple example, a business may list its shares with a face value of Rs. 10 but a market value that starts at Rs. 50. But sometimes, the opposite occurs, making it crucial to understand both terms.
The interplay between face value and market value is crucial for making informed investment decisions. Face value serves as a baseline for accounting and calculations like dividends, while market value reflects real-time investor sentiment.
For any strategic investor, understanding both is not just an academic exercise but a practical necessity.
Although few organisations are founded with a face value of INR 10, the majority have a value of either INR 100 or INR 1. A public limited company must have a minimum face value of INR 1 to be listed on the stock market, according to SEBI.
A company’s face value will be lowered to ₹1 when it chooses a 1:10 split on a ₹10 face value share. In other words, a single share of ₹10 will now be divided into ten shares of ₹1 each.
The face value of a company’s shares could be raised if the company expects that it will have a promising future. This is because investors are ready to pay a higher price for shares in businesses that they believe will be successful in the future.
No, the face value cannot go below ₹1. The minimum face value of INR 1 is set by SEBI. Most organisations have a face value of either INR 100 or INR 1, and few corporations are established with a face value of INR 10.
It is usually allocated by the corporation arbitrarily. From the perspective of the company, the face value assignment is crucial as it aids in determining the accounting value of the entity’s shares. After that, its balance sheet makes use of this value.