If you are an investor or trader in the stock market, it is a must to know about the core concept and use case of the face value of shares and bonds. Whenever a publicly listed company launches its IPOs, it sets up a price known as face value. Generally speaking, the amount at which the company’s stock is bought by investors. Sometimes this term is also called par value.
It’s the company’s value as it is listed in its share certificate and books of account of the company. This price is decided by the organization when it wishes to launch stock or bonds in the open market.
What is Face Value?
The par value of a stock is the value of the company’s net worth, at which the shares are issued on their first day in the share market. Face value is the price at which the investor can purchase or sell it in the stock market. If you check the current price of an already issued share in the market, it will be different from the face value. The difference occurs due to interest or dividends, which keep the stock value flexible.
As an investor, you must know the face value of the share does not show its current market price. For example, if the company announces good news, the valuation of the issued share will increase. If terrible news comes out, there will be a drop in the valuation of issued shares in the market.
Why is Face Value an Important Term?
Face or nominal value is very important in accounting and the stock market. Below are some major points you must know to understand the importance of face value in the stock market.
- Face value helps us to calculate premium value.
- It hints at the current market value of the already issued stock.
- This term is helpful in evaluating the rate of interest provided by the company.
- This key measure is often used to assess profits.
Let’s take a little comprehensive look to understand why the term face value is essential with a simple example. Suppose company ABC Ltd needs to get a fund of Rs 5 crore to meet its business requirements. It is wishing to issue a Rs 5 lakh debenture with a face value of Rs 50 each. Here the company’s decided face value will assist in figuring out the expenses, including the liable interest amount. If it decides to pay @2.5% interest on the issued debenture, its expenses will be Rs 15,000 yearly.
Face Value vs Market Value?
|Basis||Face Value||Market Value|
|Price Fluctuation||The face value is not affected by market fluctuations; it remains the same as fixed by a company.||Market value changes as per the market conditions. Price changes can occur due to macroeconomic effects, government rules, and global impact.|
|Price Determination||It is kept by the issuing organization based on its net worth.||The stock price is decided based on trading activity in the share market. It changed when trading was executed.|
|Price Decision||It is decided when the company issues its shares in the open market.||It is the present value of the share in the stock exchange that keeps changing frequently.|
|Calculation||This value can not be measured as it is decided by the organization as per its net worth.||It can be determined by dividing the worth of the issuing company by the number of issued shares in the market.|
Let’s also understand book value.
Book value is another most commonly used term in the stock market and accounting. It is the value of the shares mentioned in the company’s financial books. This value is measured by fractionating the organization’s net worth or deducting liabilities from assets by the number of stocks launched in the market.
How does the Face Value Affect the Stock Trading Decisions?
When a company issues its shares, and the issued share starts getting exchanged in the stock market, share buyers or investors get some privileges. These privileges are some rights in company decisions, such as the right to vote on significant events or decisions affecting the company and the right to receive the dividend on owned shares or stocks.
Nowadays, stocks come in two types such as common and preferred stocks. The common stock lets the investor claim the company’s assets and earnings concerning owned shares. If a company becomes rich or increases its worth with time, the investor can also become wealthy. But if the company does not perform well, these investors will face huge losses on their investment. Whereas preferred stocks provide a fixed dividend, they don’t see any earnings fluctuation when the company increases or decreases its profits and wealth.
Does Face Value Share the Worth of the Company?
The face value hardly shares the company’s worth, but it’s used to calculate one. For example, if you want to buy a share of a company in the stock market, you would need to know its value. If you are going to sell the share, you would need to know the value, so you can come up with a profitable deal and make money from investing in the stock market.
In all these cases, you would look for the company’s financial statements and other measures rather than face value. Face value is just a contract between two people, the owner of the share and the company, where the company promises to pay from the future profit to the owner of the share.
Can We Modify the Face Value of Stocks?
The face value of stocks can be modified by corporate actions, such as stock splits. This way, the stock price decreases by dividing the shares into subunits.
Are Principal Value and Face Value the Same?
Generally speaking, face value is similar to the principal or par value. Hence, if you meet up with an existing trader or investor in the stock market, you may often hear them speaking these terms in their place of face value.
Terms like face value, principal value, book value, and market value are some important terms that every investor, trader, and student must know if they want to make the best use of the available financial data of the company for trading decisions.
Thus, we hope you have learned the meaning of face value, its importance, use cases, and other terms discussed in this article. If you keep willing to learn such interesting concepts of the stock market, make sure to stay tuned with our latest posts.