What is Face Value in Stock Market? Meaning, Formula & Myths

Face value is the nominal value of the shares. But have you ever thought as to why the face value is given such importance in the stock market? Why do companies mention it during IPOs? Can it impact your dividend and the investment journey? 

To find the answers to all these questions, we first need to understand what is face value in the stock market, examples, face value vs market value, how to calculate face value, and much more!

Face Value - Meaning

The face value of a share is its original cost as stated by the company, and it usually remains unchanged throughout the life of the share. This value is also referred to as the par value or nominal value. Unlike market prices, the face value does not fluctuate based on investor sentiment or market trends.

The face value, which is printed on the share certificate, will not change unless it is revised due to any corporate decisions, and this value is important to understand the dividend payout, as well as other major corporate financial activities. 

Formula to Calculate Face Value

In order to calculate the face value of a share, we can make use of the formula given below:

Face Value = Equity Share Capital / Total Number of Shares Issued

Let us understand this with a simple example. Suppose a company has an equity share capital of Rs 10 crore, and the number of shares is 1 crore, the face value of one share would be as follows: 

Face Value = Rs 10,00,00,000 / 1,00,00,000 shares = Rs 10 per share

When is Face Value Used? 

Face value is a core concept in finance that serves several functions related to financial instruments. It acts as the nominal value assigned to a share at the time of issuance and plays a vital role in calculating a company’s share capital and maintaining accurate financial records. It is also important from a compliance and reporting perspective, as it provides the foundation for key accounting entries.

Beyond issuance and accounting, face value is used in dividend declarations, where it serves as a reference point for calculating payouts. It also serves as a key parameter that is adjusted during corporate actions such as stock splits, where the face value is changed to reflect the alteration in the number of shares. 

Why do Companies Mention Face Value in IPOs?

Companies mention face value in IPOs for several important reasons, primarily related to legal, accounting, and future corporate actions. Here is a breakdown of why face value is crucial in an IPO:

Financial statements:

Face value is fundamental for calculating a company's share capital or equity capital on its balance sheet. It forms the basis for various accounting entries and is reflected in the company's books.

Issue price and premium:

In most IPOs, the shares are offered to the public at a price significantly higher than their face value. This higher price is called the issue price. The difference between the issue price and the face value is the premium. By disclosing both the face value and the issue price, investors can clearly see how much of the IPO price is the nominal value and how much is the premium being charged based on the company's valuation. 

SEBI Guidelines on Face Value

Companies have the flexibility to decide the face value of their shares, provided it is a whole number and not a fraction of a rupee. However, specific guidelines apply in the case of an Initial Public Offering (IPO):

1. If the issue price is Rs 500 or more, the company is allowed to set a face value lower than Rs 10, but it cannot be less than Rs 1 per share.

2. If the issue price is below Rs 500, the company is required to maintain a face value of Rs 10 per share.

Common Myths Around Face Value

Despite being one of the most used financial terms, face value is often misunderstood by investors. Let us debunk some of the most common myths surrounding face value:

Higher face value means a stronger/better company. 

This is perhaps the biggest misconception. The face value has no direct correlation with a company's financial strength, profitability, or future growth potential. A company with a Rs 1 face value could be a multi-crore rupees giant, while a company with a Rs 100 face value could be struggling. What truly matters are the company's fundamentals (earnings, revenue, balance sheet, management, market share, etc.) and its market capitalization.

Shares cannot be traded below their face value.

This is false. While companies generally prefer to issue shares above face value (at a premium), if a company is performing poorly, losing market share, or facing financial distress, its market price can easily fall below its nominal face value. This is often the case with ‘penny stocks’ or struggling companies.

Face value determines the market price.

Absolutely not! The market price of a stock is determined by the forces of supply and demand in the stock exchange. It's influenced by various factors, including the company’s financial performance, growth prospects, industry trends, economic conditions, investor sentiment, etc. Face value is fixed at the time of issuance, while market price fluctuates constantly.

Face value is what you will get back when you sell your shares.

When you sell your shares, you get the prevailing market price, not the face value. If you bought a share for Rs 100 and its face value was Rs 10, and you sell it for Rs 120, you make a profit of Rs 20. If you sell it for Rs 80, you incur a loss of Rs 20. The face value is irrelevant to your selling proceeds.

Face Value vs Market Value

While the face value of a share is fixed and set by the company at the time of issuance, the market value is dynamic and constantly changing. Now that we have understood what is face value in stock market, let us now look at face value vs market value. 

Conclusion

From determining a company’s share capital to calculating dividends and understanding stock splits, face value holds significance in several corporate and legal contexts. However, for investors, it’s important to understand that face value and market value serve very different purposes. The market value reflects what a share is truly worth at any given moment, driven by market forces and investor sentiment, while face value remains largely constant.

By grasping the concept of face value, investors can make more informed decisions and better understand the financial anatomy of the companies they invest in!

FAQs

Q1. Is higher face value good or bad?

A higher face value is neither good nor bad because it is simply the nominal value assigned by a company at the time of issuance.

Q2. Which face value is good? Rs 1 or Rs 10?

Investors often think that a higher face value yields a higher return. But in reality, the focus should be on the company’s fundamentals and growth prospects rather than its face value.

Q3. What is the minimum face value of share as per SEBI?

As per SEBI, the minimum face value of a share is Rs 1.

Q4. What is the maximum face value of share in India?

As per SEBI, there is no maximum value of shares that is fixed by SEBI. However, it can be decided by the company itself.

Q5. What if share price is less than face value?

If the market value is less than the face value, it is selling at a discount or below par.