Face Value in Stock Market: Everything You Need to Know
It is the dollar value of an issuer’s security. Face value, also referred to as par value, or par, is a representation of the value of a company’s common stock.3 min read
2. Stock Shares
3. Setting Face Value
4. Determining Total Face Value of Shares
5. Face Value & Market Value
6. Understanding Stock Splits
Face value in stock market is the dollar value of an issuer’s security. Face value, also referred to as par value, or par, is a representation of the value of a company’s common stock.
The face value of a bond is the amount that the issuer provides to the bondholder after the bond has reached maturity. The bond might be worth more based on its interest rate, or the profit might be based on the increase from a below face value issue price and the face value of the bond at maturity. Regardless, face values for bonds will provide for a guaranteed profit.
However, bonds that are sold on the secondary market could fluctuate depending on the interest rate. As an example, if the interest rate is higher than the bond’s coupon rate, then the bond would be sold at a discount below face value. However, if the interest rate is lower than the bond’s coupon rate, the bond would be sold above face value.
Zero-coupon bonds are those that provide no additional interest to the bondholder; these types of bonds are usually sold below face value since that is the only way in which a bondholder can earn a profit.
The equity share capital is the face value of the share multiplied by the number of shares held. The cumulative face value of all the company’s shares identifies the amount of capital that must be maintained by the business. Only money that is in excess of the capital required can be given to investors in the form of dividends. Therefore, depending on how much money the business can maintain, the shareholders might not receive dividends in a given year.
Setting Face Value
Not all companies are required to have shares at face value; it depends on the state where the business was incorporated. Even if the state requires setting face value, there isn’t a requirement for what must be listed as face value upon issuance of the stock, which allows companies to use reduced face values, so they can identify how much money must be kept in the reserves. For example, the face value of company A might be $1 per share, while company B might be $0.0001 per share.
Determining Total Face Value of Shares
A business can’t sell shares at less than face value; alternatively, the company can sell them for more. If the company issues shares for more than face value, the money a shareholder receives is called additional paid-in capital. This face value must be identified separately from the paid-in capital on the company’s balance sheet.
Face Value & Market Value
The face value is not the actual market value. The face value doesn’t change, whereas the market value can fluctuate based on the company’s performance. Specifically, market value is the current price of the share when it is sold. It is a specific price at a point in time. Such market values are determined based on the company’s supply/demand, which is often evidenced by what investors are willing to buy or sell for that specific security on any given day. In fact, based on market fluctuation, the face value and market value might not be correlated to one another at all.
Understanding Stock Splits
Stock splitting means that your stock will actually get split. This is done if the company (the issuer) wants to change the face value. In order to do this, they must split the shares. If the face value of the share was $1, and that share is split into two, the face value of the share is now $0.50. Therefore, you will now have two shares, each for $0.50, rather than one share at $1.
When it comes to stock splits, the company must follow certain steps in order to advise shareholders of such split ratios:
1.The company must announce the stock split on a given date, known as the record date.
2.The company must provide what the new face value will be.
3.Generally, a few weeks after the record date, the shares will start trading ex-split on the exchange(s).
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