What is the Meaning of Face Value of Share

 

Face Value of a Share (also called Nominal Value or Par Value) is the original, fixed value assigned to a share by the company at the time of its issue, as stated in the company's Memorandum of Association (MOA) and printed on the share certificate. It represents the minimum value of a share as per the company's official records, and is used as the basis for accounting and legal purposes — but it is generally different from the share's actual market price.

In simple terms: Face value is the "book value" or "stated value" of a share as fixed by the company when it was created — a fairly arbitrary, fixed number (like ₹10, ₹5, ₹2, or ₹1) that stays constant, regardless of how the share's price fluctuates in the stock market due to demand, company performance, or economic conditions.

Key characteristics:

1.    Fixed at the time of incorporation/issue – Decided by the company and mentioned in its Memorandum of Association (MOA)

2.    Used for accounting purposes – The company's Share Capital in its balance sheet is recorded based on face value × number of shares issued, not market price

3.    Basis for dividend declaration – Dividends are often declared as a percentage of face value (not market price) — e.g., "10% dividend" on a ₹10 face value share means ₹1 per share

4.    Doesn't reflect true market worth – A company's share might have a face value of ₹10 but trade at ₹500 or more in the market, depending on the company's performance and investor demand

5.    Common face values in India – Typically ₹10, ₹5, ₹2, or ₹1 (companies choose this at the time of setting up their capital structure)

Face Value vs. Market Value vs. Book Value (important distinctions):

Term	Meaning
Face Value	Fixed, nominal value assigned at issue (e.g., ₹10); used for accounting and legal purposes
Market Value	The price at which the share is currently bought/sold in the stock market; fluctuates based on demand, supply, company performance, market sentiment
Book Value	The value of a share based on the company's net assets (Total Assets − Total Liabilities) divided by the number of shares outstanding; reflects the accounting-based intrinsic value
Issue Price	The price at which a company actually issues/sells the share to investors, which can be at par (equal to face value), at a premium (above face value), or at a discount (below face value, subject to legal restrictions)

How Face Value relates to Issue Price:

Type of Issue	Meaning
At Par	Shares issued at exactly the face value (e.g., ₹10 face value share issued for ₹10)
At Premium	Shares issued above face value (e.g., ₹10 face value share issued for ₹150 — the extra ₹140 goes into the Securities Premium Account)
At Discount	Shares issued below face value (rare and, in many jurisdictions like India, restricted/regulated — e.g., sweat equity shares may sometimes be issued at a discount under specific conditions)

Why Face Value matters:

1.    Share Capital calculation – A company's total share capital is calculated as: $$\text{Share Capital} = \text{Face Value per Share} \times \text{Total Number of Shares Issued}$$

2.    Dividend declaration – Dividends are usually expressed as a percentage of face value:

o    Example: A company declaring a 20% dividend on a share with ₹10 face value means the shareholder receives ₹2 per share (20% of ₹10), regardless of the share's market price

3.    Stock splits – When a company does a stock split, it's essentially dividing the face value (e.g., splitting a ₹10 face value share into two ₹5 face value shares)

4.    Legal/statutory reference point – Used in various company law provisions, including minimum share capital requirements (where applicable) and calculations related to buybacks, reductions in capital, etc.

Why Face Value is different from Market Price:

The market price of a share is driven by factors like:

·         Company's financial performance and future growth prospects

·         Overall demand and supply of the shares in the market

·         Broader economic and market conditions

·         Investor sentiment and expectations

Since these factors constantly change, a share's market price can be significantly higher or lower than its face value — face value simply doesn't move with these factors, since it's a fixed, nominal figure set at issuance.

Quick example:

A company issues shares with a face value of ₹10 each. Over the years, due to strong business performance, the shares now trade in the stock market at ₹450 per share.

·         Face Value = ₹10 (unchanged, fixed)

·         Market Value = ₹450 (fluctuates based on market conditions)

·         If the company declares a 15% dividend, shareholders receive ₹1.50 per share (15% of ₹10 face value) — not 15% of the ₹450 market price

Why it matters for investors:

Understanding face value helps investors correctly interpret company announcements like dividend percentages, bonus issue ratios, and stock splits — since these are often expressed in relation to face value, not the fluctuating market price, and confusing the two can lead to misunderstanding a company's actual returns or corporate actions.