When a company decides to go public, one of the key considerations is the share’s face value. The face value is the price printed on the face of the shares, representing the initial cost of purchasing a share in the company. The face value is important because it sets the tone for the IPO and will directly impact the number of money investors are willing to pay for the shares.
There are a few different ways to determine the face value of shares in an IPO. One method is to set a price that the company believes is fair. Another method is a valuation method, such as the discounted cash flow method, to determine what the shares are worth.
Once the face value in an IPO is set, the company must determine how many shares to issue. This number will be based on various factors, including the amount of money the company wants to raise and the number of shares investors are willing to purchase.
After issuing the shares, they will be traded on the stock market. The price of the shares will be determined by supply and demand, and it may be higher or lower than the face value. Ultimately, the goal is to price the shares to generate a good return for the investors.
What is Face Value?
The face value of a stock is the original price of the stock when it was first issued. The face value of shares in an IPO is the price per share the company issuing the IPO will receive from investors. The company may choose to set the face value at a higher or lower price than the current market value of its shares, depending on the goals of the IPO.
For example, if the company wants to raise a lot of money from the IPO, it may set the face value at a higher price than the current market value. On the other hand, if the company wants to ensure its shares are widely held, it may set the face value at a lower price.
The face value of a company’s stock is determined according to a variety of factors. Companies give it a random assignment. They are available in Rs. 1, Rs. 2, Rs. 5, or Rs. 10.
Meanwhile, it’s important to know the difference between the stock’s issue price and face value. The extra premium above face value that a company charges potential subscribers is the issue price.
The issue price is calculated as = Face value + Premium.
How is Face Value Calculated?
The face value is determined by dividing the total number of issued shares by the net worth of the firm or company. The difference between a company’s assets and liabilities is its net worth.
total number of issued shares
Face value = ——————————————
company’s net worth
Where,
Net worth = Assets – Liabilities of a company
For instance, if a firm wishes to issue 1000 new shares and its net worth is Rs. 1,00,000, the face value of those shares will be Rs. 100.
A share can never be purchased at its face value since no one will ever sell a share at that price, per SEBI regulations, which state that all shares issued in IPOs must be sold at nominal prices.
Brokers are allowed to sell their remaining shares to customers at face value, but they won’t since they are prohibited from doing so by the requirement that they only sell shares for the issue price.
Also Read: What is an IPO & Benefits to Invest in IPO in India?
Importance of Face Value
Understanding the face value meaning and its importance is necessary because it is used to calculate the dividend that a shareholder will receive. The dividend is the portion of a company’s profits that are distributed to shareholders. For example, if a company has a dividend payout ratio of 50% and earns ₹1000 in profits, it will distribute ₹500 in dividends to shareholders.
The stock’s face value defines its present market value and aids in figuring out the premium. In addition, the calculation of earnings and interest rates also heavily relies on face value.
The face value is also used to calculate the price-earnings ratio (P/E ratio). The P/E ratio measures a company’s stock price relative to its earnings. It is calculated by dividing a company’s stock price by its EPS.
In summary, the face value is an important number for stocks.
Conclusion
Understanding the face value in IPO might make your investments easier to grasp. Comprehending terms like face value, market value, etc., may improve your investing approach and help you get the most out of your investments in the stock market.
Face value is a minor factor for an investor only looking for a profitable investment. Face value is still an important idea for a retail investor, though. To put it simply, understanding face values can help you determine the level of success an investment would bring you if you were to invest in a company.
