The face value of an equity share, also known as the par value or nominal value, is the fixed value assigned to each share when it is initially issued by a company. It represents the legal capital per share of the company and is typically mentioned on the face of the share certificate. The face value has little to do with the actual market value of the share and does not reflect its current worth in the stock market.
What is the importance of face value of equity share?
The face value of an equity share holds significance in various aspects:
1. **Identification**: Face value helps in identifying the nominal value of each share and distinguishes it from others.
2. **Accounting Purposes**: It is used for accounting purposes to calculate and record the company’s legal capital.
3. **Dividend Calculation**: Dividends on equity shares are often declared as a percentage of the face value. Thus, it helps in calculating the dividend payable.
4. **Legal Rights**: The face value determines the rights of shareholders, such as voting rights, entitlement in case of liquidation, and participation in decision-making processes.
5. **Price Bands**: Stock exchanges often set price bands based on the face value, dictating the maximum and minimum prices within which a share can be traded on a given day.
6. **Stock Split and Bonus Shares**: Face value is used to determine the ratio for stock split or issuing bonus shares. These actions do not affect the company’s overall valuation.
Frequently Asked Questions:
1. What is the relationship between face value and market value?
The market value or current price of a share is influenced by various factors and can be significantly different from its face value.
2. Can the face value change?
No, the face value remains constant throughout the life of a share, regardless of market fluctuations or company performance.
3. What is the significance of the face value when buying shares?
When buying shares, the face value is less relevant compared to other factors such as the company’s financials, growth prospects, and market conditions.
4. Do companies issue shares at face value?
Companies may issue shares at a premium or discount to the face value, depending on market demand, company reputation, and other factors.
5. Are higher face value shares more valuable?
No, the face value does not determine the actual value of a share. The market value is determined by factors like demand, supply, company performance, and investor sentiment.
6. What happens if the market value exceeds the face value?
If the market value surpasses the face value, it indicates that the share has experienced capital appreciation or gained value over time.
7. Is it possible for the market value to be less than the face value?
Yes, the market value of a share can be less than its face value, especially during economic downturns or when the company faces financial challenges.
8. Can face value be zero?
No, face value cannot be zero as it represents the nominal value of a share assigned by the company at the time of issuance.
9. How is face value different from book value?
Face value represents the nominal value of a share, while book value is the net value per share calculated by subtracting liabilities from assets.
10. Does face value influence stock market performance?
The face value alone does not directly influence stock market performance. It is the overall evaluation of a company’s financial health, growth potential, and other factors that impact stock market performance.
11. Can face value be negative?
No, face value cannot be negative as it represents the basic legal capital per share.
12. What is the role of face value in determining the share premium?
The premium on shares is calculated by deducting the face value from the market price. The face value provides a baseline for such calculations.