Face Value in the Stock Market- Meaning, Purpose and Formula

The price of stocks keeps changing every second during market hours. The primary force behind this is the demand and supply, and we call this price the current market price. But what about the price at which the company issued the stock? This is where face value in the stock market comes in.

This article will entail all the details related to face value in the share market. Let's begin.

What Is Face Value?

Face value is the  price set by the company as the base price or nominal price of its securities, which it is offering in the market. The company issuing the securities has all the rights to decide the face value of the stock or bonds without any compulsion.

Face value is crucial, as this is the price at which the nominal share valuation is recorded in the books of accounts. Once the stocks or bonds are issued in the market, then the demand and supply determine the market price of the security.

Understanding the Working Face Value of Shares

When you see a share certificate, you can see the face value mentioned in it. This price of the stocks has nothing to do with the market price of the stocks that you see on the stock exchanges.  This is the price, which is known as ‘at par’. When and if the market price equates to this price, then it will be termed at ‘at par’, which means equal.

How Does the Face Value of a Share Denote its Worth?

When a company issues its shares for the first time, it has to report to SEBI and determine a price for the shares. This is where the requirement for face value comes in. In the draft red herring prospectus, the company needs to mention at what price they want to issue the shares in the market.

This is to understand the intrinsic value of the share as determined by the company itself. The face value of any share remains the same from its initial public offering until there is a stock split.

However, to an investor, the face value has negligible worth, as it is not required in any kind of financial analysis, or valuation purpose of the company.

Importance of Face Value of a Share

1. Calculating the value of shares in the company

2. Determining the dividend payout

3. Considered during stock split

4. Understanding if the stock is trading at a premium or a discount

5. Figuring out how much premium or discount is available on the stock

Formula of Face Value:

It is quite simple to determine the face value of the stock though it is already given in the stock details or the share certificate. You can compute face value in the stock market for any stock just by dividing the total equity share capital of the company by its outstanding number of equity shares.

Face value formula is: 

Face Value of a Stock = Total Equity Share capital/ outstanding number of equity shares

Difference between the Face value and Market value

Factors Influencing Face Value of Share

Now that you know what is the meaning of face value in the share market, let's understand the factors that influence this value –

• Prospects: First thing first, the company with a better prospect can set its face value high, as the investors will be willing to pay more for its shares. If the company has an economy of scale, or exploring multiple geographies where the demand for its product is on the rise, then it can set a higher face value.
• Net worth: After prospects, it is the net worth of the company that is taken into account for determining the face value of the company's stock. The higher the net worth, the higher would be the face value.
• Interest rates: When the interest rate in the economy is high, investors can get good returns on their investments from fixed-income investments, so why would they invest in equity? They would only invest when the value they can earn is higher and for the same, the face value goes up.
• Dividends: If the face value of a company is higher, it means, it can pay higher dividends and this can get more of the investors with income-earning mindsets to invest in the company.

Conclusion

Thus, face value in the share market is important to the companies that are issuing their shares in the market and also has some significance for the investors, though very nominal. However, as an investor, it is always compulsory to check the face value before investing in any stock.

FAQs on Face Value in the Stock Market

1. What is the face value of stock for example?

At the time of the initial public offering, suppose the company ABC Ltd. has mentioned the share price as Rs. 10. So, this is the face value of the stock. 

2. Is higher face value good or bad?

Higher Face means, a higher net worth of the company, great prospects, and good dividend payouts, and thus it can be considered beneficial for the investors.

3. What happens when face value is increased?

When face value increases, the dividend payout percentage can also increase, and it indicates good business performance.

4. What is the good face value of share?

There is no particular price for the face value of a share. It can depend on the industry, sector, and kind of business.