Listen audio version
If you are looking for information about how shares are valued, then you have come to the right place.
This article will tell you everything that you want to know about the face value of a share and its role in share trading. So, keep on reading.
What is face value in share market:
The face value of a stock is the nominal or par value of that stock, which represents the price of an original share when that company was created.
That means if you buy shares from the company itself, you pay at least that stock’s face value.
“Face value” is also used to refer to the amount stated on a security certificate, such as a bond or stock.
Important: Face Value is simply an indication of how much was invested in the issue (how much capital was raised) when the security was first sold. In the share market, face value refers to the actual worth of a company.
In order to understand the concept of the face value or par value, let us provide you with a real example.
Let’s consider an electronics company ABC that manufactures and markets laptops.
The owners of this company decided to issue one lakh shares at Rs. 10 per share, which means the total amount received by the company is Rs. 10 lakhs from selling shares to customers.
This amount is known as face value or par value in share market.
This means that each share of the ABC company will have a face value of Rs. 10.
The owners issue these new shares in the market (stock exchange) through IPO by offering them for sale at a premium.
The company sells the shares of Rs. 10 each for a price that is greater than Rs. 10 per share, say at Rs. 50 per share.
The premium or higher price at which these shares were sold to customers is known as market value because the shares are sold in the market at a price that is higher than the par value.
How the face value of Stock is Decided:
The face value of a share is decided by its issuing company based on certain factors such as cost incurred while producing any good or any service, the average profit earned by the company and future prospects of that particular share etc.
Market Vs Face Value:
Market value is different from face value; it refers to the current market price at which shares are being traded in the stock exchange.
Market value is what someone will pay if you want to sell your shares today.
This can be higher than (or lower than) its face value, depending on how much investors think that the company will grow in the future.
Example: If someone buys a share at Rs 300. The face value is Rs 100, and the market value is Rs 200/-.
After 2 years if the price of that share rises to Rs. 5000 then, the market value will be Rs 5000/-
Note: Face value is fixed in the share market but the market value of shares or mutual funds changes day by day and depends on the market.
The dividend is the distribution of part of a company’s earnings, decided by the directors to shareholders in addition to the share value.
The dividend is a part of the face value, in most stocks dividends are declared as per their face value.
Consider ABC Ltd. whose face value is Rs. 10 per share and market value is Rs. 700 per share
“Face Value = Rs 10 per one share”
“Market Value = Rs 700 per one share”
If the company declares a dividend of 25% then Shareholders of ABC Ltd will receive 25% of their face value per share not the market value of ABC.
Why it is Good to see Face Value of any stock:
It is important to consider a company’s face value when purchasing its shares for two key reasons:
1. It can help you determine your total cost of ownership.
2. It can give you a clearer picture of that company’s value.
For companies with skyrocketing shares, it may be important to know the face value when looking at its total market value.
The reason for this is that even if a company’s share price has gone up by thousands of rupees, you need to determine its actual worth before determining what it will make as a return on your investment.
Considering the face value can help you get a clearer picture of that company’s actual worth, as its current market price does not necessarily reflect shareholder equity or any other factor that affects its total valuation.
How to check face value of any share:
In your share certificate, you will clearly see the face value of the share.
Also to find out the face value, you can just look into your Demat account.
Another way you could do it yourself online anytime for free using ‘Google’
The stock market at an all-time high, it’s important to understand what you’re investing in and why.
Investors need to know that a share price does not reflect its true value; there are many other factors involved like dividends paid out by companies as well as fluctuations due to currency rates.
The face value of any company reflects this while also providing investors with valuable information about their investments.
Have any thoughts? Let me know below in the comments!