The Indian stock market is growing at such turbo-speed that, according to a Bloomberg article, India’s listed market capital is just 4% behind the UK’s!
With the increasing enthusiasm of Gen-Z towards the market, India’s stock market participation is projected to keep expanding in the long term. But before you venture into the fascinating stock market world, it is crucial to start with the basics. And today, we deep dive into the meaning of face value and explain how it differs from market value.
Investors buy shares of companies at market price, but many are unaware that each share has a designated face value. Let us look at this fundamental feature of a share.
When a company is formed, it has to issue equity shares to its promoters and register the incorporation papers with the Registrar of Companies (RoC). The face value of the shares issued to promoters is mentioned in the Memorandum of Association (MoA), Articles of Association (AoA) and other documents submitted to the RoC and other Government Authorities. Hence, the face value of a share holds pivotal significance for a corporation.
Similarly, when a company goes public, i.e., makes a fresh issue of securities in the public market, it has to determine its shares’ face value. This face value is mentioned in the documents submitted to authorities at Initial Public Offering. Therefore, the issuing company’s responsibility is to keep the SEBI, Stock Exchanges, Clearing Houses, and the public informed of its shares’ par value.
When a company goes public, it issues securities or bonds with a particular value. In the earlier decades, physical share and bond certificates were issued to the security holders. These physical certificates mentioned the face value for the holders’ reference. The mandatory requirement of physical certificate issuance is done away with, and the transfer happens through brokers’ online sites or apps.
Face value helps determine the accounting value of the shares and bonds issued, which is mentioned in the company’s financial statements – particularly the balance sheet.
For your detailed understanding, here are some crucial points to keep in mind:
For an investor, it is crucial to be aware of the face value of the asset that they are purchasing. This knowledge comes in handy when stock splits happen due to corporate actions. So if a company decides to split its share with a face value of Rs. 10 into ten shares of the face value of Re. 1 each, the investor would notice a tenfold jump in the quantity of the inventory held. But that does not equate to a ten times monetary benefit as the market value of the share also gets aligned with the new face value.
Another point to note is that when a company declares dividends, it is based on the financial value of the share, irrespective of its market value.
Face value knowledge helps in understanding the following –
Market value is the rate at which the company’s shares are exchanged between the buyer and seller – determined by market conditions. Market value is not the same as the book value.
To understand the fundamental difference between the face value and market value of a share, let us look at the table below –
Particulars | Face Value | Market Value |
Price | The face value price remains constant until changed explicitly by the company itself. | The market value price keeps changing as per market conditions. |
Determined by | The issuing company fixes face value at its discretion. | The market dynamics determine market value. It constantly changes as the trading on exchanges continues. |
Calculation | The total number of shares issued by the company multiplied by its face value determines its share capital. | A company’s market capitalisation is calculated by multiplying the stock’s current market value with the number of outstanding shares. |
Once determined by the issuing company, the face value of a share mostly remains the same. In specific cases, the company may decide to change the face value. Such decisions need various compliance actions on the company’s behalf. The company would need to pass a shareholder’s resolution and alter the Capital Clause of the Memorandum of Association. Also, various submissions are to be made with the Registrar of Companies and Stock Exchanges.
Generally, face value changes when the company splits stocks. In such cases, the face value of the share is reduced as per the company’s directives. In some instances, the face value is also increased by the company.
Face value, par value or nominal value is the price determined by the company for the shares it issues. The issue of securities could be a public issue or a private placement; irrespective of the type, the face value is set on the date of security insurance
Currently, SEBI has prescribed a minimum face value of Re.1 for shares issued in the securities market. Setting the face value of a security is entirely at the issuing company's discretion. However, the company must ensure that the Regulatory Authority of the Stock Exchanges - SEBI regulations are followed.
Face value is the security price shown in the books of accounts. Market value is the share price prevailing in the market on which transactions are carried out.
Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.
Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.
Open Demat Account &
Trade @ Rs15 per order.
“Filing of complaints on SCORES – Easy & quick”
Please note that by submitting the above mentioned details, you are authorizing TradeSmart to call and email you and also to send promotional communication even though the contact number may be registered under DND.