Face Value of Share: Par Value Meaning in Stock Market

Tating dividend payouts. he face value represents the price assigned by a company to its shares at the time of incorporation. It is used by companies for calcul
13 Dec, 2023 11:09am
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As an investor, the market price is one of the many factors you need to take into account before you make a trading or investment decision. However, to make an informed decision, you also need to be aware of the face value of the shares you’re planning to invest in. But then, what is the meaning of the face value of a share and how does that differ from the market price? Here’s everything you need to know. 

 

What is Face Value in the Stock Market? 

Also known as the nominal value or par value, the face value refers to the base value a company assigns to its shares at the time of its incorporation. It represents the lowest possible price at which a company can issue its shares. For instance, if the face value of shares at the time of incorporation is set at Rs. 10 per share, the company can not issue shares below this price.  

 

The nominal value of shares is usually specified in the company’s share certificate and financial statements. Although this value is generally set at the time of incorporation, a company may choose to revise the face value of its shares at any point in time during its existence. In fact, there have been many instances where companies have either increased or decreased their face value through stock consolidations or stock splits respectively. 

 

Significance of Face Value of Shares 

Now that you know the meaning of face value, let’s look at a few situations where it is used by the company.  

 

Legal and Accounting Purposes

The par value is used primarily for legal and accounting purposes. It helps a company determine its capital structure and the number of shares that it wishes to issue. 

 

Dividend Calculations

Companies routinely use nominal value when determining dividend payouts to their shareholders. Generally, dividends are declared as a percentage of the face value. For instance, if a company declares a dividend of 150% of its face value of shares, which is Rs. 10 per share, then the dividend that shareholders are entitled to receive would be Rs. 15 per share (Rs. 10 x 150%). 

 

Issue of Shares 

The face value is crucial when a company issues new shares or redeems existing ones. For instance, companies issuing shares to the public for the first time (via an IPO) always tend to price them higher than their nominal value. 

 

In such cases, the face value can be used to calculate the share premium and to determine whether the shares are priced appropriately. The share premium is the difference between the issue price and the par value of the shares. 

 

So, if the face value of a company’s shares is Rs. 10 and it decides to issue new shares for the first time for Rs. 500 per share, the share premium would be Rs. 490 (Rs. 500 - Rs. 10).  

 

What is the Difference between the Market Value and the Face Value of Shares? 

In the context of the stock market, both the face value and the market value represent two different concepts. Let’s take a look at a few differences between the two. 

 

Definition 

The face value of shares represents the base value assigned to shares at the time of incorporation. This value doesn’t change unless the company actively attempts to revise it through stock consolidations or stock splits. 

 

Market value, meanwhile, represents the current price at which shares are being traded in the stock market. The market value of shares is subject to change based on the forces of demand and supply. 

 

Factors Affecting the Value 

As you’ve seen before, there are no factors that can bring about a change in the face value of shares. In the case of market value, however, many factors can affect it. This includes the company’s financial performance, micro and macroeconomic factors, market sentiment, demand and supply forces, and industry trends, among others.

 

Indication of Company’s Worth 

Although the face value is used for legal and accounting purposes and to determine dividends, it is not an indicator of a company’s worth or the true value of its shares. The market value, on the other hand, is a good metric that indicates a company’s worth since it represents the price that investors are willing to pay to acquire its shares. 

 

Conclusion

With this, you must now be aware of what the face value in the share market is and how a company uses it for various purposes. To sum up, the par value is primarily used for legal and accounting purposes and serves no real purpose for investors other than for determining the amount of dividend that they’re eligible for. 

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