The Role and Importance of Face Value of Share

There are various terms that one will come across time and again in the stock market that give out the value and ownership of the shares of a company. One such basic concept includes the face value of a share, otherwise known as par value. This article explains the relevance of face value of share in the stock market, What is face value of share and how it differs from face value.

What is Face Value of Share?

The issuing company sets each stock share’s value during the initial public offering (IPO). It means the “face value of Share.” This sum is often located on the stock certificate and may be used to calculate the firm’s valuation. Each share that an investor purchases may be shown to have a possible par value.

The market value of a share is always equal to its face value; most shares are worth 10 or 100 rupees. An organization may use the face value of each share to determine its free-market share selling price. Additionally, it could provide information on the company’s asset value and cash on hand.

Importance of face value of share

The face value of share is a significant aspect of share capital as it is of importance in the functioning of a company. While the face value of share doesn’t directly reflect its current market worth, it holds significance in several aspects:

• Legal Capital: The face value of share is the minimum amount the company should maintain as legal capital. The portion must be retained within the business entity and cannot be paid out as dividends.
• Dividend calculation: Dividends may instead be declared using the face value of the shares. The corporation may pay a 10% dividend on each share’s face value. A rupee will be awarded for each Rs. 10-valued share.
• Accounting purpose: On a company’s balance sheets, the face value of share is used to calculate their worth. In addition, it facilitates the process by clearly documenting the business’s financial transactions.
• IPO pricing: Because it establishes the price the company is willing to pay for a share, the market value of a share is essential during an initial public offering (IPO). A share does not always need a market price higher than its face value to be deemed valuable.

Face Value vs. Market Value of a Share

Mathematical equations or abstract notions may be used to explain the market value of a share. “Face value” and “market value,” two phrases used to refer to the same item, are different. What a share is worth on a stock exchange right now is its market value. Supply and demand, in turn, influence price; these factors include market, investment, and success.

Nevertheless, the face value of a share doesn’t change. It is unaltered from the moment it is offered to the broader audience. Before taking further action, you should know that the share’s market value may differ considerably from its face value. Several variables might cause the market value to surpass the book value, such as the company’s overall health, growth potential, and overall market upswing. Its market worth, however, may be less than its face value if the company’s finances or shares aren’t doing well.

What is Face Value of a Share with Example?

Let’s assume a fictional company XYZ Ltd., which has decided to distribute one million shares at a value of 10 rupees each, illustrates the “face value” of a share. According to every share certificate that XYZ Ltd. signs, each share will be worth 10 rupees. It is necessary to establish the formal capital and the reward base, among other things.

Multiplying this sum by ten and adding together all the shares yields 10,000,000 shares. The market value of a share of XYZ Ltd. is Rs. 50. Investors may now buy shares as a result. It suggests that the company’s shares are valued five times more by the market than they are worth.

Corporate Actions and Face Value

The face value of share is altered when a company splits its shares, pays out bonuses, or merges with another.

Stock Splits

The split ratio is used to multiply the number of shares divided by each share’s face value in a stock split. Simply put, a 3-for-1 stock split will split a Rs.15 unit into three shares of Rs.5 each.

Bonus Issues

Depending on how many certificates they possess, owners in bonus issues get extra regular shares at no further cost. On this occasion, the face value of the shares remains constant, but the quantity of shares added does not.

Consolidation/Reverse Split

This is the reverse of the stock split. Here, many lots are combined into one, leading to a corresponding increase in the face value of a share. For instance, in a 1:5 reverse stock split, five shares of Rs.2 face value will be combined into one share of Rs. 10.

Case Study

Tata Consultancy Services (TCS)
TCS is yet another excellent Indian example. One TCS share had a face value of Rs.10 in the past. The business has provided incentives and stock splits to its staff throughout the years. TCS lowered the share value from Rs.10 to Rs.1 in 2006. The goal was to make the shares more accessible to smaller buyers while maintaining the significance of face value in capital accounting.

It is essential for all investors, new or experienced, to understand the what is face value of share? Even while it may not seem like much, a share’s face value significantly impacts a company’s legal capital, accounting procedures, and dividend estimates. After seeing an example of a share’s face value, buyers may better grasp stock investment and business financial management.

The face value of share is one of the most important factors in the stock market. It serves as the basis for several laws and financial calculations. The goal is to encourage you to optimize the value of your assets with SMC Global Securities. Working with SMC, their team of experts will provide you with complete financial solutions and individualized advice. The face value of a share doesn’t change in response to things like stock splits, IPOs, or bonuses. It is essential to maintain consistent and comprehensible financial data.
Reference: 

https://www.investopedia.com/terms/f/facevalue.asp

Corporate actions and impact on stock prices

https://groww.in/p/what-is-face-value

Author: All Content is verified by SMC Global Securities.