The fixed value of the share that is decided by the company when it opens an Initial Public Offering (IPO) is known as the face value of the share. The face value is also known as the par value or the nominal value of the share.
The face value is listed in the books and share certificates of the company as the original value of its stocks. It is used as a parameter to analyse the market value of stocks, returns, premiums, etc. It is important to note that the face value does not change, it is always fixed.
How to determine the face value?
There are no one particular criteria for deciding upon the face value of a stock. The companies assign the value in an arbitrary manner. The value is either Re. 1, Rs. 2, Rs. 5 or Rs. 10. At times the face value can also be Rs. 100 but it rarely rises to Rs. 1000.
The issue price is a sum of the face value and the premium. The company determines the premium after analysing its success metrics like earnings, revenue and expansion.
The usefulness of face value
Face value becomes an essential tool while calculating the market value of the shares, interest payments, returns and premiums. Additionally, face value is employed while announcing a stock split. This can be understood with an example.
Suppose the share price of a firm rises to Rs. 5000 with a face value of Rs. 10. It would become very difficult for the retailers to invest Rs. 5000 in a share. Therefore, the company can split the share into 5 shares which increases the liquidity. Post the split, the face value comes down to Rs. 2 and the price of the share reduces further to Rs. 1000 from the previous Rs. 5000.
Another important use of face value can be seen when companies announce dividends. Companies use the face value instead of the share price in this case.
For example, when a company announces 100% on a share with a face value of Rs. 2 and a share price of Rs. 200, the dividend is calculated on the face value. Thus, the dividend will equal Rs. 4 per share.
Understanding the concept behind face value ensures a clearer understanding of the major business announcements made by the companies. It also enables the investors to make more informed decisions.