The face value of a share signifies the nominal value assigned to it by the issuing company, as specified in the share certificate. This value is determined at the discretion of the company and is often denoted in the range from Rs. 1 to higher denominations. While the face value holds importance in the company's internal accounting processes, it is crucial to note that it remains independent of the current market price of the share, which is dictated by market forces like demand and supply.
Working of face value of shares
The face value holds significance in dividend calculations, where dividends are typically declaredas a percentage of the face value of shares. This fixed percentage provides a basis for determining the return on investment for shareholders. Additionally, corporate actions, such as stock splits or bonus issues, can influence the face value. Stock splits, for instance, are employed by companies to enhance the liquidity of their shares, making them more accessible to investors.
Furthermore, the face value holds a similar role. It represents the principal amount that will be repaid to the bondholder upon maturity. Similar to shares, the face value of a bond is crucial for calculating interest payments, which are often expressed as a percentage of the face value.
While the face value might not directly impact the market dynamics, it serves as a fundamental element in various financial calculations, regulatory compliance, and shareholder communications within the dynamic landscape of the stock market.
Importance of face value in stock markets
The face value of a share plays a significant role in the stock market for both companies and investors. Here are some key aspects highlighting its importance:
- Bookkeeping and accounting:
The face value is crucial for companies in maintaining accurate financial records. It helps in calculating the accounting value of the company's shares, providing a basis for financial statements and accounting practices. - Legal and regulatory compliance:
Stock exchanges and regulatory authorities often use the face value as a reference point for various regulations and compliance requirements. It serves as a standardised measure for financial reporting and legal documentation. - Investor information:
Investors use the face value as one of the indicators when analysing a stock. While it does not directly reflect the market value, it provides a starting point for understanding the company's financial structure and its commitment to shareholders. - Fixed dividend calculations:
Face value is instrumental in determining dividends. Companies declare dividends as a percentage of the face value of shares. This fixed percentage allows investors to anticipate their dividend income based on their shareholding. - Corporate actions:
Corporate actions such as mergers, acquisitions, or restructuring often involve adjustments to face values. Understanding these adjustments is essential for investors and analysts to make informed decisions during periods of corporate change.
Formula of face value
The formula for face value is straightforward:
Facevalue = Equity capital/ Outstanding shares
Difference between face value and market value
Aspect | Face Value | Market Value |
Definition | Nominal value set by the issuing company. | Current price of a share in the open market. |
Constancy | Generally, remains constant. | Subject to constant fluctuations. |
Influence on Share Price | Does not directly affect market price. | Directly affects the market price. |
Purpose | Used for accounting, regulatory compliance, and dividend calculations. | Reflects the actual worth of a share at a given point in time. |
Corporate Actions | Altered by corporate actions like stock splits or bonus issues. | Continuously influenced by market demand, supply, and investor sentiment. |
Stability | Stable and does not change frequently. | Can change rapidly based on market dynamics. |
Face value in the case of a stock split
1. Definition:
- A stock split involves dividing existing sharesinto multiple shares, effectively reducing the face value per share.
2. Purpose:
- Companies opt for stock splits to make shares more affordable and increase liquidity.
- Despite the reduction in face value per share, the overall market value may remain relatively stable.
3. Example:
- If a company with a face value of Rs. 10 undergoes a 2-for-1 stock split, each shareholder will receive two Rs. 5 face value shares for every Rs. 10 share held.
Importance of face value in calculating dividends
1. Dividend declaration:
- Dividends are often declared as a percentage of the face value of shares.
- Face value provides a fixed reference point for determining the dividend amount payable to shareholders.
2. Consistency in dividend payments:
- Using face value in dividend calculations ensures a consistent and predictable income for investors, as the percentage remains constant.
3. Investor income expectations:
- Investors rely on the face value to estimate their dividend income based on the number of shares they hold.
Conclusion
The face value of shares in the stock market serves as a foundational element for various financial calculations, regulatory compliance, and investor decision-making.While it may not directly influence market dynamics, it provides essential information for understanding a company's financial structure and facilitating transparent communication between companies and their shareholders.
