Understanding the face value of a share is fundamental for anyone involved in stock market investments. Let’s get into what face value means, its importance, and how it contrasts with market value, providing you with a clear understanding essential for making informed investment decisions.
What is Face Value?
The face value of a share, also known as the par value or nominal value, is the value assigned to a stock at the time it is issued. This value is typically set by the issuing company and is stated on the share certificate. In India, it is often a nominal amount, such as Rs 10, Rs 5, or even Rs 1 per share.
Importance of Face Value
1. Basis for Accounting
Face value is crucial for a company’s accounting and financial statements. It helps in determining the share capital of the company, which is the product of the face value and the number of issued shares.
2. Dividend Calculation
In some cases, dividends are declared as a percentage of the face value. For example, if a company announces a 20% dividend on a share with a face value of Rs 10, the dividend per share would be Rs 2.
3. Stock Splits and Consolidations
The face value plays a significant role during corporate actions such as stock splits or consolidations. In a stock split, the face value of each share is reduced while the number of shares increases, maintaining the overall capital. Conversely, in a consolidation (or reverse split), the face value increases, and the number of shares decreases.
4. Bond Pricing
For bonds, the face value is the amount paid to the holder at maturity. It is also used to calculate interest payments.
Read More: What is Face Value of Share?
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