What is Face Value of Share?

Last Updated : May 22, 2023, 3:05 p.m.

Simply put, face value is the security value that its issuer initially sets. It is the cost that is set in the certificate. The face value of share is one of the basic concepts of the stock market that anyone trading in stock should learn about. It is also known as par value. It is called so because of its value in certificates, digital records, or books. This term is the first thing you will deal with in the stock market. So, knowing the answer to ‘What is face value of share’ is very important. The stocks are traded through IPOs (Initial Public Offerings) by publicly traded firms. That is when a security’s face value or par value is fixed.

This article will discuss share certificates along with the face value of shares, the method of calculating face value and the difference between the face value and market value.

What is a Bond or Share Certificate?

Businesses offer bonds and shares with a set face value or par value. Many factors determine the face value of share of a company. Usually, the corporation assigns the face value, and the company that sells those shares issues the documents. This certificate contains everything about the shares of the company, including the issue date, class of shares and most importantly, face value.

This step is crucial to calculate the stock’s accounting value. For an investor to start trading, determining the face value is necessary. A share certificate mentions the face value of the bond or share.

Why is the Face Value of a Share Important?

The importance of face value of share is very high for stocks, bonds, investments, and stock exchanges. Here are a few reasons in favour of the significance of face value.

• Once a face value is set for security, it becomes easy to calculate the profits generated.
• Face value aids in the process of figuring out the premium.
• Determining face value is essential to calculate the rate of interest.
• This set face value is the principal factor for determining the stock’s current market value.

Face Value Vs Market Value

What is face value of share? After answering this question, we must understand the significant differences between a stock’s face and market values. Below are a few differences to help you understand the contrast between the face and market values.

Definition

We must first determine how we define these two terms concerning the stock market.

Face value is the value of stock that the issuer decides during issuance. It is the formal and nominal value of the stock entered in the bond or share certificate.

On the other hand, the stock market’s current price, as displayed on the stock exchange, is the market value. Market value is a reliable indicator to the investors about the company’s future.

Variations in Price

Variations in the stock prices are another difference between the face value of share the market value.

For face value, the price fluctuations do not make any difference. As mentioned earlier, face value remains unaffected by any change in the stock price. It is the issuer’s predetermined price for the security.

Price variations impact market value significantly. This fluctuation might occur in the market due to global events, the company’s internal operations, government policies, currency value, etc.

Determining the Stock Price

Determining stock price is one of the necessary things to know after learning what the face value of a share is. This is how the price is determined for face value and market value.

For face value, as mentioned previously, the price is determined by the corporation for issuing the bond or share certificate.

Market value price varies according to the response to changes at which the securities were bought. It depends directly on the demand and supply.

Calculations

The calculations for the market value and face value of share are done very differently.

Face value is obtained by dividing the Equity Share Capital by the Outstanding Shares.

Face Value = Equity Share Capital / Number of Outstanding Shares

On the contrary, market value is obtained by the current stock price by multiplying the number of outstanding shares.

Market Value = Current Stock Price x Number of Outstanding Shares.

These are some of the main differences between market value and face value. It helps to answer the question, what is face value of share?

Apart from these differences, another term is closely associated with the market. The book value is closely associated with face value and market value. You can divide the number of issued shares by the difference between assets and liabilities (the company’s net value) to calculate the book value. This term speaks about the stock value recorded on the company’s books.

Conclusion

The face value of share is a fixed value of the claims, and the price fluctuations do not affect them. The face values can also be modified due to stock split. The market value of a stock is not based on face value only. Various influencing factors separate the face value of share from its market value. Face value is the expected and minimum price of a security.

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