Understanding the face value of stocks is important for anyone involved in the financial markets. Whether you’re new to investing or have experience, knowing about face value helps you make better financial decisions. In this article, we will cover what face value is, how it’s calculated, why it matters, and how it differs from market value. By the end, you’ll have a clear understanding of face value and its role in stock investments.
What Does Stock Face Value Mean?
The face value, also called the nominal or par value, is the initial value given to each share. The company’s board of directors determines the face value, usually at the time of incorporation or when new shares are issued. Unlike the stock’s market price, the face value remains constant and does not fluctuate.
It is mainly used for accounting purposes and does not represent the share’s market value. It ensures that shares cannot be issued below this minimum amount, providing a baseline for financial accounting.
When a company is incorporated, initial capital is introduced, known as equity share capital. This capital is divided into shares based on the face value set by the board of directors. The shares are distributed to the initial investors, including promoters, based on the amount of capital each one contributes.
Example: On January 1, 2024, ABC Pvt. Ltd. was incorporated with initial capital contributions from three promoters. The contributions were as follows: ₹30 lakh, ₹30 lakh, and ₹40 lakh. The board of directors set the face value at ₹5 for each share. Consequently, the company’s total capital of ₹1 crore was divided into shares with a face value of ₹5 each, resulting in a total of 20 lakh shares (₹1 crore / ₹5 per share). The shares were allocated among the promoters based on their investment amounts: the first and second promoters each received 6 lakh shares, corresponding to their ₹30 lakh investments. In comparison, the third promoter received 8 lakh shares for their ₹40 lakh investment.
Note: The Securities and Exchange Board of India (SEBI) has set the minimum limit for the nominal value of shares at ₹1, meaning that the nominal value cannot be lower than this amount.
Formula - Face Value
The formula used to determine the nominal value of a stock is:
Face Value = Equity Share Capital / Total Outstanding Shares
Where,
Equity Share Capital: Equity share capital is the total amount of money raised by a company through the issuance of equity shares. It is determined by taking the nominal value of a share and multiplying it by the total number of shares issued by the company.
Total Outstanding Shares: It refers to the total number of shares a company has issued to its shareholders.
Note: You can find information about a company’s equity share capital and total outstanding shares in the company’s balance sheet, financial news websites, stock broker applications, or stock exchange websites.
Real-World Example - Reliance Industries
Let’s calculate the nominal value for Reliance Industries: (September 24)
Equity Share Capital of Reliance Industries: 67,67,09,87,930 (6,767 crores)
Total Outstanding Shares of Reliance Industries: 6,767,098,793 (676 crores)
Calculations: 67,67,09,87,930 / 6,767,098,793 = 10
Reliance Industries Nominal Value = INR 10 (per share)
Importance of Face Value
The importance of a stock’s nominal value includes:
- Determining share capital: The nominal value is used to calculate the total equity share capital of a company. For instance, if a company issues 1,00,000 shares with a nominal value of ₹10 each, the total share capital is ₹10,00,000.
- Determining the premium amount: The face value assists investors in figuring out the premium for each share. The premium is the additional amount paid above the face value of the stock when shares are issued.
- Total Share Capital: The face value is used to calculate the total share capital of a company. For instance, if a company issues 1,00,000 shares with a face value of ₹10 each, the total share capital is ₹10,00,000.
Factors Affecting Changes in a Stock's Face Value
Factors Affecting Changes in a Stock’s nominal value are:
- Stock splits: A stock split is a corporate action where a single share is divided into two or more shares. It decreases the nominal value of each share and increases the total number of shares outstanding according to the split ratio. While this adjustment does not change the total nominal share capital, the market price per share adjusts in proportion to the split ratio.
- Corporate Restructuring: Changes such as mergers, acquisitions, or reorganizations can lead to adjustments in the face value of shares.
Face Value Vs. Market Value
♦ Face Value: The face value also known as nominal value set at the time of the company’s incorporation or when new shares are issued. This value remains constant and does not change frequently.
- Issued Value: It is set by the company’s board of directors at the time the shares are first issued and remains constant unless adjusted due to any corporate actions.
- Accounting Basis: It is used to determine the equity share capital reported on the company’s balance sheet. To calculate equity share capital, multiply nominal value by the total outstanding shares.
- Dividends: A company declares a dividend based on the nominal value of its shares. For example, if a share has a nominal value of ₹10 and the company declares a dividend of ₹30 per share, it represents a 300% dividend.
♦ Market Value: Market value is the current price at which a share is traded on the stock market. It fluctuates based on supply and demand, investor perceptions, and overall market conditions.
- Fluctuates with Market Conditions: Unlike nominal value, market value changes regularly based on factors such as company performance, economic conditions, investor sentiment, and broader market trends.
- Valuation Metric: This is used to assess the company’s total market capitalization by multiplying the market value per share by the total number of shares outstanding.
- Represents Investor Sentiment: Market value shows what investors are currently willing to pay for a share based on their views and the overall market situation.
Conclusion
The face value, or nominal value, represents the original value assigned to each share, determined by the company’s board of directors at the time of incorporation or when issuing new shares. This value remains fixed and typically does not change frequently. It is calculated by dividing the equity share capital by the total number of outstanding shares. Understanding nominal value is essential for grasping the basic structure of a company’s share capital.
FAQs
Q1. Can nominal Value be changed?
A1. Yes, the face value of shares can be changed due to stock splits, mergers, acquisitions, reorganizations, etc.
Q2. Does Face Value and Par Value mean the same?
A2. Yes, face value and par value are the same thing and are often used in place of each other.
Q3. What does the nominal Value of 1 reflect?
A3. A nominal value of ₹1 indicates that the company’s equity share capital and total number of outstanding shares are equivalent.
Q4. Does nominal value influence an investor’s decision to buy or not?
A4. Nominal value generally does not influence an investor’s decision to buy or not buy shares.
Q5. How Is nominal value Determined for Newly Issued Stocks?
A5. Nominal value for newly issued stocks is determined by the company’s board of directors and is set at the time of issuance.
Q6. What does a company do with the extra money it raises from issuing a share above its nominal value?
A6. The money collected at nominal value is recorded as part of the company’s share capital on the balance sheet, representing the nominal equity base. The extra money received above the nominal value, known as the share premium, is recorded in a separate “share premium account.” This additional amount can be used for different purposes, such as expanding operations, investing in new projects, reducing debt, or enhancing the company’s financial stability.
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