If you have lately been looking at Initial Public Offerings (IPOs), you might have come across the term "face value." Known sometimes as the par value or nominal value of a share, face value is the basic denomination of a company's share. It is the value the company assigned at the time of issue and remains constant independent of changes in the share's market price. Usually, a company's shares have a face value of Rs 2, Rs 5, or Rs 10.
Remember that the face value mostly relates to legal and accounting needs. Face value is important when a corporation calculates dividends or counts share capital for financial reporting. It does not, however, accurately represent the actual value or market price of the company shares.
The Part Face Value Plays in an IPO
Structured Share Capital
When a company decides to go public with an IPO, some of its ownership is sold to the general people. One can get the total share capital—that is, equity capital—by multiplying the face value by the number of shares. During a stock exchange listing of the company, this function becomes crucial for legal and regulatory documentation.
For example, supposing a company holds one million shares valued Rs 10. From these shares, the total share capital is thus Rs10 million. Though the market price of the shares increases to Rs20, the computation of share capital for accounting will continue to utilise the Rs10 face value.
Calculations of Dividends
Many firms base their dividend announcements on face value. For example, On a share with a Rs10 face value, a 10% dividend would translate to Re1 per share. Knowing the face value, then, can allow you to grasp the dividend amount should the company decide to share earnings.Policies on Split and Bonus Share
A stock split, say a 2-for- 1 split, lowers the value of every share but increases your ownership of twice as many shares. Their value is set by face value and the same applies for bonus shares.
Difference between Face Value, Issue Price and Market Price
Face Value
The company's predetermined price upon the issuing of the shares In accounting, it remains the same except for a split or a merge. is applied to figure share capital as well as some payouts including dividends.Issue Price
The price a company goes public for the first time sells its shares to the general public.
Usually, its cost exceeds its face value
It also shows how valuable a firm seems, the state of the market, and the growth of a company.
Market price
The market price that is, the share's selling price on the stock exchange upon listing.
It varies depending on sector statistics, firm performance, and state of the market.
It could be either more or less than the issue price and the face value.
For instance, suppose that the company decides on its face value to be Rs10. Strong brand recognition and excellent market conditions, however, lead it to decide to price its IPO at Rs 30 per share—including a Rs 20 premium above face value. Should the IPO attract strong demand, the shares may list at a market price over Rs 30 or may drop below Rs 30 should market mood be less than predicted.
Why Investor Face Value Matters
Explicit Cost
Though face value helps maintain consistent bookkeeping records, the market price reveals what a share is worth right now. It can also present a better analysis of the premium the business charges during the IPO.Clarifying Dividends
Should the company distribute dividends as a percentage of the face value, you can more readily determine the potential income from those payments.Company Actions
Other company actions, like stock splits, and bonus shares all frequently refer to the face value. Understanding this value allows you to realise how these events could affect your ownership.Adhering to the Policies and Guidelines
Financial standards demand a declared face value, thus you can use it to confirm data in the company report such that everything matches and is clear.
Knowing face value will help one to understand how an IPO works. Face value is essential in accounting, dividend announcements, and stock split operations even though it does not show the market value or business success.