In this article we talk about what is face value of shares and how it impacts your investment decision
When investors and companies talk about the “face value” of their shares, they refer to its nominal value, i.e. the price of the shares written officially in the share certificate, which is usually a value like ₹1, ₹2, ₹5, ₹10. While the term face value is typically used for bonds, it can be of note while discussing stocks as well. Before a company is officially taken public, it is valued as per its face value. That is the reason why face value is typically explained using the example of an IPO (initial public offering)
Let’s take the shares of Infosys for example. When it was IPO’d in 1993, the face value of the company was just ₹10, while its offering price was ₹95. The difference between these prices is called the market premium that Infosys was charging from potential investors in return for fund offerings. (By the way, the Infosys IPO was undersubscribed, but the story of how the stock shot up since is a marvel in itself). Adding to this, when a company declares a profit and announces a dividend, it is issued on the basis of the face value instead of market value.
However, note that while this face value figure is typically an arbitrary number, the market premiums and the journey of the share price are not. So, what exactly is the difference?
Face Value vs Market Value
The face value of the share is the cost of a share of the company valued before its listing in the stock exchange. Post the IPO, each share trades at the market value in the stock exchanges.
While the face value of each share does not change as per market conditions and sentiment, the market value of the shares does. You can also calculate the market capitalization of the company by multiplying the total amount of outstanding shares with the market value, while you can’t do the same for face value post the IPO.
Face Value Vs Book Value
The terms face value and book value tend to be interchanged, even though it does not mean the same thing.
Book value refers to the total amount of cash the shareholders will receive per share if the company had to sell all their assets and pay off the liabilities, i.e. the company gets dissolved.
Let’s assume a hypothetical company has 1 crore outstanding shares, priced at a face value of ₹10 face value; the company’s equity will be worth ₹10 crores (face value (₹10) * outstanding shares (1 crore)). We can also assume its total assets to be worth ₹50 crores and total liabilities to be worth ₹20 crores.
To calculate the book value, we use the given formula
Shareholders equity = Assets – Liabilities
= ₹50 crores – ₹20 crores.
= ₹30 crores.
Therefore, we find that the book value of the company is worth ₹30 crores. Dividing it with the total number of outstanding shares gives you a book value per share of ₹30 crores/ 1 crore = ₹30. This means if the company shuts down, each shareholder will receive ₹30 per share.
Summary
Face value:
The face value is the cost which the company is valued at before the IPO.
Market Value:
The market value is the current price per share as per market conditions, sentiments, and assessments of future growth prospects and leadership.
Book Value:
The book value indicates any residual capital for shareholders in the scenario the company has to liquidate itself.
Face value of Shares – Frequently Asked Questions (FAQs)
1. Should we invest in companies based on their face value or book value?
The face value will be meaningless in assessing the strength of publicly listed companies. However, investing based on book value may give you an idea of its balance sheet strength, although that should not be your only parameter.
2. Can the face values of company shares change?
Face values of company shares change only in the scenario of corporate actions like stock splits and not due to other conditions that can cause changes in the stock price. For example, if Infosys, currently trading at ₹1540 and face value of ₹5 announces a 1:1 stock split, the market price will be halved to ₹770 and the face value will be halved to ₹2.5
3. Is face value related to the current stock price?
The face value is assigned arbitrarily for accounting purposes of a company’s stock for a company’s balance sheet. The face value of a share has nothing to do with the current stock price.
4. How to calculate the face value of the stock?
Face value cannot be calculated as it is arbitrarily assigned by the company for accounting reasons