What is Face Value of Share

When embarking on your journey into stock market investing, the first concept to grasp is the share's face value. This value, also known as the par value, is established when the company issues the stock. This seemingly straightforward term carries significant importance in the world of finance.

Face Value of Share Meaning

The face value, also known as the nominal or par value, of a share is the fixed nominal amount stated on the stock certificate. It represents the original value of the share when the company first issued it. Market forces like supply and demand do not determine face value, but rather, it is a static, arbitrary value set by the company.

It's important to note that the face value does not reflect the share's current market price. For instance, if positive news about a company's products emerges, the face value's valuation would increase. Conversely, if negative information regarding a company's products were to be announced, the face value's valuation would decrease.

Importance of Face Value

Now that you know what is face value of share, let’s understand its importance. Its importance lies in -

• Legal and Accounting Considerations: The face value plays a crucial role in legal and accounting matters. It helps determine the company's authorized capital and can affect regulatory compliance, such as minimum capital requirements. Investors may consider a company's ability to comply with such regulations as an indicator of stability and adherence to legal standards.

• Dividend Calculations: Some companies use the face value to calculate dividend yield. Dividend yield is arrived at by dividing the annual dividend per share by the face value. Investors who desire regular income may consider face value when evaluating dividend-paying stocks. However, dividend yield should not be the sole criterion for investment decisions, as it doesn't account for potential changes in dividend policies or market conditions.

• Voting Rights: In some cases, a company's bylaws may tie voting rights to the face value of shares. Shares with a higher face value may grant more significant voting power in shareholder meetings. This could be a consideration for investors who want a say in the company's decision-making processes.

• Liquidation Value: When a company faces the unfortunate situation of liquidation or bankruptcy, shareholders find themselves in a position where they may receive a portion of the remaining assets. This distribution is often determined, in part, by the face value of their shares, and it plays a crucial role in the order of priority when settling a company's outstanding obligations.

Formula for Computing Face Value

The formula to compute face value is as follows: Face value = Equity share capital / Outstanding number of shares

Difference Between Face Value and Market Value

It's important to distinguish between face value and market value. While the face value is a fixed nominal value, the market value is the actual price at which a share is trading on the stock market. Various factors, including supply and demand, company performance, economic conditions, and investor sentiment influence market value.

A share's market value can be significantly different from its face value. In most cases, shares trade at prices higher than their face value due to market dynamics and investor perceptions of a company's prospects.

How Does a Share’s Face Value Affect Investment Decision?

The face value of a share can affect investment decisions in several ways, although its impact is relatively limited compared to other factors. Here's how face value plays a role in investment decisions:

1. Stock Affordability: Face value can indicate how affordable a stock is. A lower face value typically means that the stock is more accessible to investors with limited capital. However, it's essential to remember that the market price is what truly determines affordability.

2. Impact on Initial Investment: The face value determines the initial investment amount when an investor buys shares directly from the company through an initial public offering (IPO) or a rights issue. Investors who participate in such offerings may consider the face value when deciding how much to invest.

3. Psychological Impact: While not a direct financial factor, the face value can psychologically impact investors. Some may associate higher face values with stability and trustworthiness, while others may perceive them as overpriced. This psychological aspect can influence investment decisions, even though it doesn't necessarily reflect the stock's underlying value.

Summing it Up

Understanding the concept of face value is a fundamental aspect of stock market investing. It serves as a reference point for various financial calculations and regulatory requirements. However, investors should keep in mind that a stock's market value, which is subject to market forces, is the key determinant of a share's actual worth. As you navigate the world of investing, remember that while face value is important, it is just one of the parameters you should consider in evaluating a company's stock.