Most beginner investors get confused between the face value and market value because from the name “face value” it seems like the value or price of a stock.
But face value is actually the initial value of stock directly proportional to the initial equity capital declared at the time of stock market listing.
Let’s discuss in a more simple and easy manner.
What is Face Value of Stock
A company gets the number of shares based on the share capital of that company and the price of that share is the face value of the stock.
Or the original value of a share in the papers or the share certificate is the face value of that share.
But companies can issue stock prices at any rate depending on the goodwill, demand, and other factors.
For example, if you opened a Pvt. Ltd. company worth Rs. 100 crores that you want to list your company in the stock market. The board of directors has decided to distribute 10 crore shares in the market. Now the face value of your every share would be –
Face value = Equity share capital/total no. of shares
= 100 crores/10crores
= Rs. 10 per share
But the market price of your share could be Rs. 200 or Rs. 300 per share.
Let’s check out the DMart IPO details to understand the face value and issue price difference. Now you can see the face value of Dmart share in the books is Rs. 10 but the issue price of DMart share is kept in between Rs. 295 to 299 per share.
Check out – How to calculate the intrinsic value of Indian stocks
Importance of Face Value
Face value tells you about the equity capital of that company.
Equity capital is the minimum capital required to maintain the business. Funds over and above equity capital can be distributed as dividends to the shareholders.
Face value has no importance from an investor’s point of view. It’s required for the balance sheet as connected with the company’s initial share capital.
Face value changes when a stock split happens. For example, if the face value of a stock is Rs. 10 and the company decided to split the stock in a 1:1 ratio.
In a stock split, the number of shares is divided into said ratios to increase the liquidity and affordability of a stock.
In 1:1, if the company has 10 crore shares, they will become 20 crores after the stock split. Splitting stock increases the number of shares only but doesn’t enhance the capital.
To rectify the balance sheet, you have to reduce the face value to match the same share capital. In the above example, since the share quantity becomes 2X, the face value would be decreased (50%) to Rs. 5 to match the balance sheet.
Apart from that, face value has no practical value for investors.
Also read – How to calculate fair value
Difference between Face Value, Market Value & Book Value
|Face Value||Market Value||Book Value|
|Actual value of a stock based on the initial share capital and the number of shares distributed in the market||The current share price of a stock||Book value is the company’s assets value as mentioned in the balance sheets published by the company|
|No practical value to an investor||The market value affects the profit or loss of an investor||Determines the potential of a stock|
|Got affected if the stock split happens||No change in market price with stock split happens but the value of stock decreases||A stock split doesn’t affect the book value|
Check out – Equity share vs Preference share
Face value is important for the company to maintain the balance sheet and keep the minimum equity reserve which should be equal to the initial shared capital. Otherwise, the face value of the stock has no practical importance for an investor.