What is Face Value?
It is essential to be aware of the various terminologies used in stock markets before commencing the trading journey. The Face value is one such important component that is used in the calculations of investment securities such as bonds and stocks. Let us understand its meaning and the crucial role it plays in the stock market.
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What is the Face Value of Share/Bonds?
Face value also referred to as par value, is the value of a firm as listed in its books and share certificates. It is the nominal or dollar value of a share. The face value of a bond is the dollar amount payable to the investor until the bond reaches maturity. It is determined by the company when it offers shares or bonds at the time of issue. An important aspect of this is that it is fixed. It is bounded by the market conditions and never changed until the company decides to split or reverse split the shares.
How does it work?
Whenever the company raises funds, the face value of the stock implies its initial value. It is not calculated but is arbitrarily allocated by the company. From the company’s point of view, the determination of this value is significant, as it is used to measure the accounting value of the company’s stock so that it could be used in the balance sheet. Hence, it is important to note that the face value has no correlation to the existing share price.
Every company issue shares along with the face value or the share value. This is clearly stated in the share/bond certificates along with the other details. In order to know the value of the shares, investors can also refer to their Demat account, since the shares certificates are issued in a digital format. For instance, when a company goes public, its share could have a face value of Rs 10 and may be traded at a market price of Rs 500.
Importance:
- It plays a very important role in assessing the company’s current market position. It is important for Legal and Accounting reasons.
- It is used to calculate the accounting value of the company’s stock for its balance sheet. It is not related to the market value of the stock.
- Certain laws require stocks of shares to have a par value to make sure that the company maintains a particular amount of financial reserves as a cushion to protect the creditors of the company.
- It can also be used for estimating interest rates, market values, premiums, and investment returns.
Difference between the Face value and Market value:
- Often, face value is confused with another common word called market value. Face value is the value of the company listed in the books of the company while the Market value is the current price at which the market values the stock.
- Usually, the face value of the share is lower than the market value. However, it could be higher than its market value in the context of penny stocks.
- The face value is decided when the company offers shares at the time of issuance and is fixed. The Market value keeps fluctuating throughout the trading time period. It is not affected by the ups and downs of the market.
- Example:- During the IPO of Avenue Supermart in 2017, the company decided the par value to be Rs. 10. An example of market value would be a stock trading at a share price of Rs 100 in the market.
- The face value cannot be calculated as is determined by the company. On the other hand, the market value can be determined by dividing the overall market value of the company by the total number of shares issued.
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Conclusion:
It is important to recognize the significance of the face value of the shares or bonds and how it varies from the market value when making investment decisions in the stock market. It can assist to gauge if the investment is underpriced, overpriced, or valued reasonably.
Author – Abha Shetty
About the author – Abha is a second-year BMS student and FRM level 1 candidate. She is very intrigued by the world of financial markets and hopes to master the art of investing and trading.
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