Face Value - What is Face Value in the Share Market?

Face value is the value determined by the company at the time of share issuance. Though it is different from the market value, it is significant when dealing with corporate actions like dividends, stock splits, share consolidations, and bonus issues. Thus, knowledge of the face value of shares is essential to understand a company's capital structure.

Key Highlights:

• Face value is used to calculate dividends and implement corporate actions like stock splits and share consolidations. 
• It is different from the market value, which changes based on demand and supply.
• Face value generally remains unchanged unless the company undertakes a stock split or reverse stock split (share consolidation).

What is Face Value?

Face value, also known as par value or nominal value, refers to the value that a company initially assigns to its shares. It is decided by the company at the time of issuing the shares and remains the same unless certain corporate events, like stock splits and share consolidations, take place.

It is the value based on which the company accounts for its shares, pays dividends to shareholders and determines its share capital.

For instance, if a company’s share has a face value of Rs 10 but it is being sold at Rs 750 in the market, Rs 10 will be regarded as the face value while Rs 750 will be its market value.

Why Do Companies Set a Face Value?

A company assigns a face value to its shares when issuing them. It serves as the base value of the share and is used for several corporate and accounting purposes. Some of the main reasons include:

• To issue shares: Every share must have a face value when it is created.
• To calculate dividends: Many companies declare dividends as a percentage of the face value.
• For stock splits and bonus shares: Corporate actions are often based on the face value of shares.
• To maintain accounting records: Face value forms part of the company's share capital shown in the balance sheet.
• To meet legal and regulatory requirements: Companies are required to specify the face value of shares under company law.

Difference between Face Value and Market Value

It’s easy to confuse face value with market value, but they’re entirely different. Here’s a clear comparison.

How Does Face Value Affect a Stock Split?

A stock split is when a company divides its existing shares into multiple shares to make them more affordable and increase trading activity (liquidity). The face value of the shares changes during a split.

For example: Suppose a company has shares with a ₹10 face value and announces a 1:5 stock split. This means:

• For every 1 share you own, you get 5 shares.
• The face value drops to ₹2 per share (₹10 ÷ 5).
• The market price also adjusts proportionally. If it was ₹500 before the split, it becomes roughly ₹100 per share after the split.

If you owned 100 shares before the split (worth ₹50,000 at ₹500 each), you’d own 500 shares after the split (still worth ₹50,000 at ₹100 each). Your total investment value remains the same, but you hold more shares at a lower price.

How Does Face Value Affect Investor Rights?

When you own shares, you get certain rights, such as:

• Voting rights to influence major company decisions.
• Dividend rights to receive a share of profits.

Face Value is related to the dividend, as dividends are calculated as a percentage of the face value. For instance, in the case of a 10% dividend, the shareholder holding a stock of Rs. 10 will receive a dividend of Rs 1. However, voting power is determined based on the number of shares held, not the face value. 

How is Face Value Used in Financial Analysis?

Face value is a small but important factor in fundamental analysis, where investors study a company’s financial health. It’s used to calculate key ratios like:

• Return on Equity (ROE): Measures how well a company uses shareholders’ money to generate profits. Face value helps determine the equity base.
• Return on Capital Employed (ROCE): Shows how efficiently a company uses its capital. Face value is part of the capital structure.

For example, a company's share capital (face value × number of shares) is used to calculate its profitability and efficiency.

Therefore, an investor must know how to use ratios to make accurate calculations when determining whether a company is profitable and efficient.

Does Face Value Impact Your Investment Decisions?

The face value of shares itself does not necessarily dictate whether one should buy or sell them, as the market value is what is actually purchased or sold in the stock market. But knowing the face value is important for the following reasons. 

• Dividends: Helps you determine the amount of dividends you would get in the form of cash for the companies you are considering with regular dividend payouts.
• Stock Splits/Consolidations: Helps you understand what happened to the number of shares and their price, hence the changes in this number.
• Financial Analysis: The ratio of the company’s share face value helps determine its financial structure and provides more information needed to make a decision.

Why it matters: While market value drives your buying and selling decisions, face value gives you a deeper understanding of dividends, company actions, and financial metrics.

Conclusion

The primary reason for having a face value is to determine the dividends and to make adjustments in case of a stock split or consolidation. The face value of shares has nothing to do with the prevailing market value. Though it does not have much impact on the share price, it plays a vital role in determining the return on investment and other significant information about the company.