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Face value is the price of a share as recorded in the books of the company. It is determined by the management and is used to calculate dividends, market price, and premium. It has no relation with the market price of the share. Also, many people often get confused about the actual difference between Face Value, Market Value, and Book Value. So this article will give you important insight into what it is and how important Face Value is while analyzing any company.
Face Value of a Share Meaning
When a company is established, it can divide its share capital into shares, each having a specific face value. Face value is the nominal value assigned to each share by the company. It is also known as the par value of a share.
In the early stages of a company, its shares are often held by the founders, co-founders, and other initial investors. When the company wants to raise money from the public through an Initial Public Offering (IPO), it may offer shares to public investors.
However, the face value of a share and its issue price are not necessarily the same.
Example of Face Value
Suppose Mr. X starts a company named XYZ Ltd. and divides its share capital into 1,00,000 shares. He assigns a face value of ₹10 to each share.
In this case:
- Company name: XYZ Ltd.
- Total shares: 1,00,000
- Face value per share: ₹10
- Total nominal share capital: ₹10,00,000
The total nominal share capital is calculated as:
1,00,000 shares × ₹10 = ₹10,00,000
Companies may choose a face value such as ₹1, ₹2, ₹5, or ₹10 per share. A lower or higher face value does not, by itself, indicate that a company is more valuable.
What Is Share Premium?
When a company issues shares at a price higher than their face value, the additional amount is called the share premium.
For example, suppose XYZ Ltd. has a face value of ₹10 per share but issues its shares to investors at ₹100 per share.
The calculation is:
- Face value: ₹10
- Issue price: ₹100
- Share premium: ₹100 − ₹10 = ₹90 per share
Therefore, the company receives ₹100 per share from investors, of which ₹10 represents the nominal share capital and ₹90 represents the securities premium, subject to applicable accounting and legal requirements.
Real-World Example: DMart IPO
Avenue Supermarts Ltd., the company that operates DMart, launched its IPO in 2017 with a face value of ₹10 per share and an issue price of ₹299 per share.
The difference was:
₹299 − ₹10 = ₹289 per share
Therefore, the IPO issue price was ₹289 above the face value. This difference is the premium over face value; it should not be confused with a company’s market price after listing.
Uses of Face Value
One important use of face value is calculating dividends when a company announces its dividend as a percentage of face value.
For example, suppose a company has a face value of ₹10 per share and announces a dividend of 120%.
The dividend per share is calculated as:
₹10 × 120% = ₹12 per share
Even if the share is trading at ₹50 in the stock market, the dividend calculation in this example is based on the ₹10 face value, not the ₹50 market price.
Here are a few more examples:
| Face value | Declared dividend | Dividend per share |
|---|---|---|
| ₹10 | 50% | ₹5 |
| ₹10 | 120% | ₹12 |
| ₹1 | 1,000% | ₹10 |
Remember, when a company declares a dividend as a percentage, the percentage generally refers to the face value of the share, not its current market price. Always check the company’s dividend announcement for the actual amount per share.
Formula of Face Value
The formula for the face value of a stock, also known as the “nominal value” or “par value,” can be given as-
| Face Value of a Share = Equity Share Capital / Outstanding Share Numbers |
Conclusion
Face value is the nominal value assigned to a company’s share. It is different from the IPO issue price and the market price at which a share trades on the stock exchange.
Understanding face value also helps investors understand share premiums, stock splits, and dividend announcements. However, face value alone should not be used to decide whether a share is cheap or expensive.
Also Read : What Is the Share Market? How It Works in India, Benefits, Risks and Beginner Tips.
