Most of the people in India think the stock market is Gambling. Yes, it’s gambling, if you invest the money in the share market without doing proper research and analysis.
In the Research and Analysis, you will get complete knowledge like how much profit the company earns in the last 5 years, the company’s future projects, loans on the company, issues with the company, assets of the company, etc.
You can analyze all these things when you know the various terminology used in the share market like PE ratio, PB ratio, ROCE, FV, etc. When you understood the terminologies, it becomes very easy to understand the stock market too.
Today, We are talking about the face value of a share. Let’s start,
What is Face Value in Share Market?
The Price of a share, when the company registered in the stock exchange. This Price remains until stocks split. Face value is different from Market Value and Book Value. It is also known as Par Value.
What, are you thinking about market value and book value? Ok, We will discuss these terminologies later. First, we will discuss what is face value of a stock?
Face value is decided by Promoters. Do you know, who is promoters? Promoters mean Founder of the Company. Founder can be a person or group of persons who decide the face value of the share.
Let’s understand it with an example,
Suppose, group of four persons started a company and invested money in that company is 10 lakhs rupees. Now, the company promoters want to register it in the stock exchange. Each share has a price which is called face value, decided by promoters, how much money they want from the market. According to that money, they share the shares.
How the promoters decide the face value of a share. Here, is the formula,
Total invested money in a company by Promoters = Face value × Number of shares
10, 00000 = Face Value ×10000
Face Value = 10, 00000 / 10000 =100
That means the actual price of the Share is 100 rupees. I hope you understand, how company promoters decide the face value of the share.
But, we saw that the price of the share is not at face value. Have, you ever thought why?
You will get your answer when we understand the difference between Face Value and Market Value.
Face Value is the Stock price that is decided by promoters, but Market Value is the share’s current price, which depends on the Demand and Supply. If the demand for a particular share is high then the price of the share is also high.
What is Stock Splits in Share Market?
For the liquidity of the stocks or we can say that to increase the number of shares, the company splits the shares. At that time, the face value is decreased but the number of shares is increased.
Always remember stock splits in a ratio like 1:2, 1:3, or 1:5. 1: 2 means one share is converted into 2 shares. 1:3 ratio means 1 share is divided into three shares and 1:5 means converted into 5 shares.
Why companies do Stock Splits?
The reason is when the Market Value of the share of a company is very high. And, it is not easy for ordinary people to invest in it. So, Company Splits the stock. The Price of Shares is decreased and the number of shares is increased.
Whenever a company splits the stock, it always hoped that the price of the share will increase in the near future.
Suppose, Company X’s one share’s value is 25000 rupees and the Face Value of a share is 10. And the total investment by people is still the same after stock splits.
If you have 5 shares of Company X and the market value per share is 25000 rupees. How much investment you have did before the stock split is: 25000 × 5 = 1,25, 000 rupees.
If stock is split by 1:5 ratio, Now, what’s the value of a share after splitting is 25000/5 = 5000 rupees. After stock splits, the market value of a share is 5000 rupees. With the same ratio, face value is also reduced by 10 × 1/5 = 2 rupees.
Now, let’s check investment is the same or not, after stock splits. After stock splits, 1 share is converted into 5 shares. How many share you have after the stock splits is 5×5 = 25 shares, Right. The Price of each share is 5000 rupees. Now, Let’s check the total investment is remain same or not, 25 share after splits × 5000 rupees per share after stocks split = 1,25, 000 rupees.
Do you know, Face value affects Dividends, Bonus and when a company bankrupts.
Affect on Dividend, when a company distributes dividends from its profit to shareholders, it provides according to face value. Sometimes, We listen Company Z gives 200% dividend to their shareholder. You have ever thought 200% of what? No, I tell you and I am sure you will be shocked.
200% of Face Value, yes my dear :-).
That means, If Company Z’s face value is 10rs, then 200% of face value is 20 rupees Per-share. How much dividend you will get if you have 5 shares.
5 ×20 = 100 rupees dividend you will get.
When a company gets bankrupt, then each shareholder gets the money at face value and not on market value.
I hope you understand what is Face Value in the share market in this article. Clear all the terminologies related to the Share market before investing.