Many people get attracted or invest in the stock market to multiply their money and achieve their objectives. To get profitable returns from the market, it is necessary to have an excellent understanding of the prominent terms. One of the most important and standard terms frequently used is the ‘Face Value of a Stock’. What does this term actually mean? Why it is important? How to calculate it? You can see, this term alone is generating a few interesting questions in our mind. So, let’s start digging about the term ‘Face Value’ in great detail.
What is Face Value?
The face value of shares is basically a fixed value that is allocated by a public company to each share at the time of its issuance. It is also referred to as the par value, stated value or nominal value of the shares. It is required to be specified in the share certificate for an easy reference and evidence. The term has a significant application in the stock market and if you are planning to invest, then the importance of face value of stocks must not be ignored.
Importance of Face Value of Share
The face value of a share has a key role in a company. It is generally used for the purpose calculating interest on the shares and bonds. Furthermore, for computing the market value, discounts, premiums, returns, etc the value of a share is taken into consideration. Let us take an example to understand the face value importance easily:
Suppose a Company ABC takes a decision to issue bonds for the purpose of raising capital. The main objective of a company is to raise Rs. 5 crore. Let’s say the face value of the company is Rs 100 and the company will issue 5 lakh bonds to meet its capital requirement.
Now, if the company decides to pay 2% interest on the bond, then it means that it would be required to pay 2% interest on the face value of Rs 100 every year. Hence, the annual interest on the bond to be paid is 5,00,000*2% i.e Rs 10000 with Rs.100 as the face value.
It is important to understand that the face value of the stocks has no connection with the market value or price. However, most of the people tend to get confused between the two terms. So, to avoid any confusion further, let us examine the prominent differences between the two terms.
Difference Between Face Value and Market Value of Shares
Many people, particularly the first time investors, are not able to find out the difference between face value and market value of stocks. The face value of the share always remains fixed, whereas, the market value is essentially the price at which the share is listed in the stock exchange, and tend to change or fluctuate according to the market conditions.
It is crystal-clear that understanding face value of shares is important to invest or trade hassle-free in the stock market. It as no relation with the market value, so do not get confused between the face and market value. It pays great dividends to know about the face value of the stocks and trade efficiently.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.