What is the Face Value of a Share?

If you are a first-time investor and have just found out that the TCS share’s actual value is just INR 1, even when it is being traded at INR 3200, you would be surprised!!!!

Well, don’t worry! Your concept will be cleared now. To find out the value of a stock in the stock market, you should know the notion behind face value, market value and book value. Speaking about TCS, its face value is INR 1 per share and its market value is INR 3200 per share.

Face Value explained with examples

The face value of a share is called its nominal value, which is its original price as stated in the share certification. It works as an accounting value and could be INR 1, INR 2 or even INR 100.

The idea of face value can be described with an example of an IPO. For instance, IRFC IPO has a face value of INR 10 of one share. But, the issue price of the share is INR 25-26.

The difference between the two is the premium charged by the company from prospective investors. So, issue price= face value + market premium

So, the face value is an arbitrary number. It is assigned from the company’s point of view as it helps assess the accounting value of its shares. But, the premium above the face value is not arbitrary at all. It relies on the growth perspective and profit of the company. The face value of a share is given in the share certificate.

Why is face value of a share important?

The face value of a share is used if a company chooses to go for a stock split or dividend announcement.

• Stock split

Usually, the face value of a share is permanent. However, if the company wants to increase its outstanding shares by splitting stock, the face value is reduced in a similar proportion.

For instance, if the market value of a stock is INR 1000 and the face value is 10. And, the stock is split into two, then its market value will be 500, and the face value will be INR 5.

• Dividend

If a company decides to announce a dividend, it is chosen against the face value. So, if a stock has a face value of INR 10 and a market value of 500 and it announces a 100% dividend, it means the dividend per share will be INR 20.

Face value vs. Market value

The face value of a share is the price at which it was valued initially. And, once the company is listed, the price at which stocks are traded becomes its market value. The market value depends on the market conditions and is volatile, while the face value is fixed.

Face value vs. Book value

Book value is the company’s remaining value when it is about to sell its assets to clear its liabilities. So, in short, it helps you find out the total amount a shareholder will get if the company shuts down.

Conclusion

Once you have chosen a company to invest in, the stock's face value doesn’t hold a lot of significance as the market value and the book value. The face value will only have meaning during the stock split or dividend announcement. So, now that you know what a stock's face value is, do not get confused about it.

19-05-2022