Face Value: Meaning, Features, and Importance

You need to understand several key concepts when investing in the share market. Doing so can help you find stocks with high potential value available at affordable prices. To achieve this, you need to thoroughly analyse a stock’s fundamentals and check if it fits your financial goals. 

The face value of stocks is one such important metric that tells you the initial price of a share. It helps to calculate a stock’s or bond’s current market value and returns from an investment. 

What Is the Meaning of Face Value?

In the world of finance, the face value of a share or a bond is its original rupee value as stated by its owner. Also known as the par value, face value of stocks measures a stock’s accounting value on the balance sheet.

It’s important to remember that this value has no relation to a stock’s prevailing price. All companies issue their shares and bonds at face value. The company’s share and bond certificates mention this face value.

Companies and government entities issue bonds to raise money from investors. Bonds have a set term after which the investor will receive the total face value of a bond. All bonds carry a face value, which tells you what amount you will get upon maturity. It is also used to calculate the interest (coupon) you will receive.

Features of the Face Value

There is no way to calculate the face value of stocks, and companies usually assign this arbitrarily when issuing shares. You can check a share’s face value using your Demat account. Most shares on the Indian market are issued at face value of Rs. 10 per share.

The face value of stocks remains fixed and is not subject to change. However, a stock split or reverse split would change this value. In stock splits, a company decides to divide its existing shares, resulting in a lower face value. For example, a 1:2 split of a stock with a face value of Rs. 10/share would reduce this value to Rs. 5/share.

In a reverse split, existing stocks are merged, which reduces a company’s outstanding shares in the market. This consolidates existing shares into higher-priced shares. Although it impacts the face value of stocks, the total value of all outstanding shares will remain unchanged.

A bond’s face value does not change, though its price can vary depending on market interest rates and the time taken for maturity. Therefore, if a bond has a face value of Rs. 10,000, a maturity period of 1 year, and a 5% interest rate, you will receive Rs. 10,500 in a year.

The face value of bonds shows its guaranteed yield, unlike that of shares. While a bond’s face value is the sum owed to investors, the total face value of stocks is the amount that a company must hold.

However, bonds issued on secondary markets can have different lending rates. For example, you can purchase a bond at a discount if its issue price is lower than the inflation rate. In contrast, a bond is issued at a high premium if its current price is lower than the discounted rate.

The Significance of Face Value of a Share

The face value of stocks is the price at which companies issue them to raise capital. This metric is also essential for calculating share-related aspects such as market values, premiums, and interest payments. Although it does not affect share prices directly, the face value is necessary for legal and accounting purposes.

All companies must hold the total face value of all their shares as capital in the form of default reserve. Money kept above and beyond this reserve can pay dividends to shareholders. These dividends are calculated on the face value of all stocks and not on their current share price.

An Illustration of How Face Value Works

Let us understand the importance of face value in the stock market with an example. A company ABC Pvt Ltd wants to raise Rs. 1 crore from the market. It can issue 50 lakh shares with a face value of Rs. 10 each. The face value would help it calculate different expenditures, like dividend payments for these shares.

Differences between Face Value, Market Value, and Book Value

The following table lists the differences between face value, market value, and bond value. 

Final Word

The face value of a security is a nominal value that a company decides for calculating market value, dividends, etc. This price is fixed and remains unaffected by market fluctuations. Specific corporate actions like stock splits can change the face value of a stock. 

When investing in the stock market, you must understand the difference between terms like face value, market value, and book value. 

Frequently Asked Questions

• Is the face value consistently lower than the market value of a stock?

No, the face value is not always lower than the market value. For example, the market value of penny stocks is usually lower than its face value. These are stocks of small companies that typically trade below Rs. 10/share.

• How can I find out the face value of a share?

Almost all financial websites that feature stocks show the face value, market value, and book value of shares. Go to any financial website and search for the stock to check out the face value. When you open the page, you can find its current price (market value), face value, and book value.  You can also find other important information like its market cap, a 52-week high, 52-week low, dividend yield, etc. 

• How does the price of a bond differ from its face value?

The face value is the bond’s price when a company issues it for the first time. The cost of the bond fluctuates while its price, which is relative to its face value, increases or decreases.

Many factors can cause fluctuations in the bond’s price. This includes its credit rating, maturity period, and prevailing market interest rates. While the interest rate is fixed, the bond’s market price changes, resulting in higher or lower yields. 

• What are some essential factors that affect a stock’s current price or market value?

The following are some of the critical factors that affect a stock’s current price:

• • The supply of shares in the market
  • Investor sentiments and demand for the stock
  • Company-related factors like debt, revenue, expansions, product launches, etc.
  • Key monetary policy rates of RBI (Reserve Bank of India) and the government
  • Major economic factors (both domestic and international)
  • Price of the Indian rupee against other currencies
  • Unfortunate events like calamities, political turmoil, terrorist attacks, etc.

Interested in how we think about the markets?

Read more: Zen And The Art Of Investing

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