If you want to start trading in stocks and securities, you must be aware of the myriad terminologies used in stock markets. One such key concept is the face value of shares and bonds. Whenever a public listed company issues its stocks through Initial Public Offering (IPOs), it fixes the face value. It is simply the price at which you purchase the shares of a particular company. Similarly, a company can also choose to raise capital or funds through issuance of bonds. These are also issued at a face value.
Also known as par value, face value is the value of the company as listed in its books and share certificates. It is fixed by the company, once it decides to issue its shares and bonds. To start trading in stock markets, you are compulsorily required to open a Demat Account and a share trading account. Here you must remember to select a reliable stockbroker, who can provide features like a free trading account .
Importance of face value in stock markets:
Face value is an important parameter for calculating various key aspects concerning shares and bonds. Face value can help to:
You can understand the importance of face value of shares with the help of an example. If a company wants to raise Rs 10 crore from the market to meet its business requirements, it can offer 10 lakh bonds with the face value of Rs 100 each. The face value fixed by the company will help it calculate the various associated expenditures, like interest payments. If the company has decided to pay 3% interest on its bonds, its expenditure towards payouts will be Rs Rs 30,000 on an annual basis.
Difference between face value and market value:
If you are a first-time investor, then you can get confused between the face value and market value. Knowing the difference between face value and market value is important, before you commence trading in stock markets. You can refer to the chart given below.
|Face value||Market Value|
|Remains unaffected by market conditions||Fluctuates according to market conditions. Changes in price can be because of changes in macroeconomic indicators, government policies and international events.|
|The price is decided by the company||Price at which the stocks are traded in stock exchanges. It will change, once trading commences.|
|It is the nominal value of stocks at the time of issuance||It is the current price of the stocks as quoted in stock exchange|
|It can not be calculated as the face value is determined by the company||Market value can be calculated by dividing the total value of the company in the market with the total number of shares issued.|
Understanding book value:
Book value is another concept, closely related with face value and market value of shares. This simply means the value of shares in the company's books. It is calculated by dividing the company’s net worth or the difference between its assets and liabilities with the number of issued shares.
Face value of shares can change because of corporate actions, like stock splits. In the case of stock splits, the company divides the existing shares into units with lower face value. For instance, if a company with a face value of Rs 20 per share has announced a stock split of 1:1, it means that one existing stock has now been converted into two units with the face values of Rs 10 each. Stock split is a measure to increase liquidity, and can help realise the true value of a company’s shares.
Thus, it is important to know about face value and market value of shares and bonds, before starting your trading journey in stock markets. You must, at all times, remember to open your share trading account with a trusted and reliable stock broker. Features like state-of-the-art trading platforms and a free trading account can translate into the best trading experience.