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The share’s face value or par value is its original cost, as mentioned in the share certificate. For instance, whenever a listed company issues its shares through an IPO (Initial Public Offering), it fixes a price called face value. In simple terms, the face value of a share is its accounting value which could be Re 1, Rs 2, Rs 5, Rs 10 etc.
The face value is the company’s value as listed in its share certificates. Companies arbitrarily fix the face value of their shares. However, assigning face value is crucial from the company’s point of view as it helps calculate the accounting value of its shares.
However, you must not confuse the face value with the market value of a share. For example, face value has no relation to the prevailing market price of the share.
The face value of a share is unaffected by the stock market fluctuations. However, the market value of a share is the current price at which you buy and sell shares, and its performance depends on its demand and supply in the stock market.
For instance, a company going public may have a face value of Rs 10 and a market value of Rs 75. The market value of a share usually exceeds its face value. However, there are certain stocks whose face value is more than their market value.
The company decides the face value of its shares. However, the market value of a share depends on its demand and supply in the stock market based on company performance.
Companies distribute a part of their profits to their shareholders as dividends. One needs the face value of a share to calculate dividends. For instance, dividends are declared as a percentage of the face value of shares.
Suppose a company whose shares have a market value of Rs 200 declares a dividend of 50%. The face value of its shares is Rs 10. One gets a dividend per share (DPS) of Rs 5 (50% of Rs 10) as the dividend is declared as a percentage of the share’s face value and not its market value.
The face value of a share changes because of corporate actions such as a stock split. For instance, in a stock split, a company divides its existing shares into units of a lower face value. Suppose a company with a face value of Rs 10 per share announces a stock split of 1:5. The face value of a share will go down to Rs 2 (Rs 10/5).
Suppose you hold 100 shares of the company with a face value of Rs 10 and a market value of Rs 5,000. After the 1:5 stock split, you now hold 500 shares of the company, but the face value goes down to Rs 2, and the price of the share falls proportionally to Rs 1,000. Companies opt for stock splits to increase the liquidity of their shares as investors perceive the share price to be cheap.
Investors get many rights, including the right to vote on major issues impacting the company when investing in its shares. Moreover, they have the right to receive dividends from the profits of the company.
Companies announce dividends on the face value of shares and not the market price. For example, if a company with a face value of Rs 10 and a market price of Rs 500 announces a 10% dividend, it means a dividend of Re 1 per share and not 10% of the share price (10% of Rs 500).
Face value is necessary during a share consolidation or stock split. Companies opt for a stock split if the share prices are perceived to be high, thereby restricting market participation and impacting liquidity. A stock split increases the number of outstanding shares in the books of the company without adding economic benefits to shareholders.
The share consolidation is the opposite of a stock split. A company changes the share capital structure by increasing the face value of shares in a defined ratio. Consequently, it reduces the number of outstanding shares to maintain the paid-up capital. For example, if you hold 100 shares of a company with a face value of Rs 2, a share consolidation in the ratio of 5:1 reduces the number of shares held by you to 20. Consequently, the face value of each share will go up to Rs 10.
However, there is no change in the company’s share capital as a decrease in the number of shares is offset by a corresponding rise in the face value of the shares. Face value is useful to calculate vital financial ratios such as Return on Capital Employed (ROCE) and the Return on Equity (ROE) during fundamental analysis.