What is Face Value of Share: Definition and Its Importance
18 January, 2025
Synopsis
The face value of a share is the nominal value assigned during its issuance.
It is critical for calculating dividends, stock splits, and corporate accounting.
Face value of a share can help investors interpret corporate actions like stock splits and dividends, aiding in better analysis and informed decision-making in the share market.
When you invest in the stock market, you're essentially buying ownership in a company. Shares represent these units of ownership. Each share has a nominal value, known as its face value. Unlike the market price, the face value remains fixed unless the company decides to alter it through corporate actions like a stock split. For example, if a company issues shares at a face value of ₹10, this is the original cost or accounting value of the share. It is important for calculating dividends, stock splits, and other key metrics.
Face Value Defined and Formula
The face value of a share is the original cost of the share as assigned by the company. It's the printed value on the share certificate.
The formula to calculate face value is straightforward:
Face Value = Equity Share Capital / Total Number of Shares Issued
Equity Share Capital: The total capital raised through equity shares.
Total Number of Shares: The number of shares issued by the company.
For example, if a company’s equity share capital is ₹10 Lakh and it issues 1 Lakh shares, the face value of each share will be:
Face Value = ₹10,00,000 / 1,00,000 = ₹10
Understand difference between Face Value vs. Market Value
It's important to distinguish between face value and market value. While face value remains constant, market value fluctuates based on factors like company performance, industry trends and overall market sentiment.
For instance, if a company’s share has a face value of ₹10 but trades at ₹500, the difference reflects investor confidence, growth expectations and company performance
Importance of Face Value in Stock Market
Explained below is why face value is important in stock market:
Basis for Dividend Calculations: Companies often declare dividends as a percentage of the face value. For example, a 50% dividend on a share with a face value of ₹10 will result in a dividend payout of ₹5 per share.
Stock Splits: During a stock split, the face value is reduced while the total number of shares increases proportionally. For instance, if a share with a face value of ₹10 undergoes a 2:1 stock split, the new face value becomes ₹5.
Accounting and Bookkeeping: Face value is used for accounting purposes and to determine the total equity share capital of the company.
Bond and Debenture Valuations: In the case of bonds, face value represents the amount that will be repaid to the investor at maturity.
Invest in the Stock Market with HDFC Bank Demat Account
While face value is a fundamental concept in the stock market, it's essential to remember that it doesn't directly impact the investment value of a share. The market value, driven by factors like company performance and market sentiment, is what truly matters. By understanding the distinction between face value and market value, you can make informed investment decisions.
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FAQs
What is the face value of an initial public offering (IPO) share?
The face value of an IPO share is the base value set by the company. For instance, a company may issue shares with a face value of ₹10 but sell them at a premium of ₹150 during the IPO. The extra amount is the share premium.
Is it possible for the face value to rise
The face value of a share does not increase on its own. However, corporate actions like stock consolidation may alter the face value.
What is the minimum face value of a share?
In India, the minimum face value of a share is ₹1. Companies can issue shares at a higher face value but cannot go below this threshold.
How can the share’s face value be reduced?
The face value of a share can be reduced through a stock split. For example, a share with a face value of ₹10 can be split 2:1, resulting in a new face value of ₹5 while doubling the number of shares.
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*Disclaimer: Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.
