Face Value Of Share: What Is Face Value And How It Differs From Market Value Of A Share

When a new investor steps into the stock market, the first wall they hit is jargon. And one of the common jargon they come across is “face value” of a share. Face value, also known as par value, is not dictated by market whims. It is the number stamped on the share at the time of its birth, when the company issues it.

Face Value of Share Meaning

The face value of a share, also referred to as the nominal or par value, is a company’s official stamp on each unit of its stock. This is not a fluctuating figure, nor does it bow to trading floors. It is written into the company’s books when the shares are issued and usually expressed in round figures Re 1, Rs 5, Rs 10, or similar.

And here is where the common arises. Face value should not be confused with the market price of a share. The market price fluctuates daily, shifting with news, demand, speculation, and sometimes market hysteria. Face value does not. For instance, a company with a face value of Rs 10 per share might trade at Rs 1,200 in the market, or tumble below Rs 10 in a downturn. The face value stays unmoved unless the company deliberately alters it through corporate actions, such as a stock split.

Importance of Face Value

There are several reasons why this fixed figure matters though it has nothing to do with what people are actually paying on the exchange floor. Here are the reasons.

Legal and Accounting Considerations

Face value defines a company’s authorised share capital. It is usually used to figure out how much capital the firm is legally allowed to raise. It also becomes central in meeting minimum capital requirements. Regulators pay attention to it, auditors reference it, and without it, financial reporting loses coherence.

Dividend Calculations

Dividends, when declared, are often tied back to face value. For instance, a 50 per cent dividend on a face value of Rs 10 means a payout of Rs 5 per share. This method has long been the standard practice, even though the dividend yield that investors track is linked to market price.

Voting Rights

In a few companies, bylaws may link shareholder voting power to the face value of shares. That means that shares with a higher nominal value can carry greater weight at the table.

Liquidation Value

In the grim scenario of liquidation or bankruptcy, face value becomes one of the markers for distributing residual assets. Creditors, preference shareholders, and equity shareholders stand in a queue, and the face value of equity shares influences the order of payout.