The share market can be complex, filled with lots of jargon and technical terms. One term that can confuse new investors is face value. While face value may not represent the most important aspect, it is important to understand what face value is so that you have a foundational understanding of how the stock market works.
In this blog, we aim to clarify the term face value, examine it in comparison to market value, and lastly explain its relevance for investors.
What is Face Value?
In simple terms, face value is simply the nominal or par value of a share stated on the company’s books. It is a fixed value of a share assigned by the company upon issuance, and it is usually a very small value, approximately Rs. 1, Rs. 2, Rs. 5, or Rs. 10. You may also think of the face value as the price tag a manufacturer puts on a good, which may or may not reflect the price it is sold for.
The face value of a share is an accounting and legal reference point, but not reflective of the share's true market value. It is what the company uses to determine its total share capital.
Face Value = Total Number of Shares / Equity Share Capital
For example, if a company has an equity share capital of Rs. 1,00,00,000 and has issued 1,00,000 shares, the face value of each share would be Rs. 100.
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Face Value vs. Market Value: Key Differences
This is the most important distinction to understand in the share market. While face value is a static number, market value is dynamic; it can change every second that the market is open.
Face Value: This is the first, nominal value of the share. This is a fixed number that does not change other than some specific corporate action undertaken by the company, for instance, a stock split. This value does not determine the stock price that you see on the trading screen, as it has little effect on it.
Market Value: This is the price at which a stock is being bought and sold in the stock market. This value is determined by supply and demand and is affected by company performance, earnings reports, industry activity, and overall market conditions. The market value is the price you actually pay for shares, or receive if you sell them.
For example, a company may issue shares with a face value of Rs. 10, but because of the company's performance and demand, it has a market value of Rs. 500, possibly even Rs. 5,000. For a greater understanding of what drives market prices, you might like to know more about fundamental analysis and technical analysis.
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Why Face Value Still Matters?
Market value is the ultimate metric when it comes to investing profits. However, face value does have a few prominent implications:
Understood in terms of dividends - Dividends are out of a company's profits and given to the shareholders. Companies will declare a payment of dividends as some amount based on the face value of the share, not the market value. For example, a company may declare a 200% dividend. If the face value of the share was Rs. 10, a dividend of Rs. 20 per share would be paid (200% of Rs. 10), irrespective of whether the stock was trading at Rs. 50 or Rs. 5000.
Stock split volume - A stock split is a corporate event that causes a company to increase the number of shares outstanding. As part of that event, the face value of the shares is also split into the same proportion. A 2-for-1 stock split will result in a face value drop from Rs. 10 to Rs. 5, and the shareholder will have two shares for every single share previously held. Although the shareholders' stocks doubled, the actual value of their holding (by this individual stock's assessment) does not change.
Corporate accounting - Face value plays a major role in displaying a company's share capital number on its balance sheet, which is important to understanding a company's capital structure in accounting. Know more about analyzing the balance sheet of the company in our blog.
Common Misconceptions to Avoid
Many novices are misled by misconceived notions, often about face value. Here is a brief dose of reality:
"Higher face value = a better company.” This is incorrect. A face value is just a random accounting number selected at the time of issue. The successful company may have a face value of Rs. 1, while a company that is doing poorly may have a face value of Rs. 100.
"Shares may not trade below their face value.” This is also incorrect. If a company is struggling, its market price will fall below its face value significantly. Often, what they refer to are shares that they classify as Penny Stocks.
"When I sell my shares, I get the face value of the shares.” Absolutely not. When you sell your shares on the open market, you get the market price, which may be many times higher or lower than the face value. If you'd like to learn how to utilize the markets for your profits, you may want to read our blogs on swing trading vs day trading.
If you’d prefer a learning structure, you may want to consider a course like the Stock Market Classes for Beginners to secure a solid foundation.
Conclusion
Face value is a basic concept for an investor to grasp in the share market. Though face value does not have a direct effect on your return for investment, it is an important reference when it comes to certain aspects of corporate governance, such as paying dividends or doing a stock split.
In your day-to-day trading/ investment, the market value is what is going to be most important. However, if you can get your head around these two concepts, you can start to move beyond the very basic understanding of corporate health and its standing in the market. If you want to build on your financial literacy even further, take a look at courses on a variety of topics, including NISM certification and fundamental analysis, working toward building a successful career or investment portfolio.
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