What Is Face Value in Stocks Market? Meaning, Example and Significance
Learn what face value is in stocks, its significance, and how it impacts investment decisions.
Face Value, also known as Par Value, is the value of a security (stocks or bonds) as stated by the issuing company. It's the nominal value printed on the share certificate or bond itself and does not change, regardless of the market conditions.
Key Points Concerning Face Value:
- Stability: The face value of a share remains constant over time, independent of its market price.
- Dividend Calculation: For stocks, dividends are often declared as a percentage of the face value.
- Stock Splits and Mergers: Face value is adjusted in the event of stock splits or reverse splits but remains a constant reference point.
Significance of Face Value in Stocks
Let's delve into why face value is significant in the stock market using real-life examples.
Example: Infosys
Imagine Infosys Ltd has a face value of ₹5 per share. Regardless of the share trading at much higher prices on the stock market (say ₹1,500), the face value remains at ₹5. This value is crucial for a couple of reasons:
- Dividends: If Infosys declares a dividend of 200%, it means ₹10 per share (200% of ₹5 face value), not of the market value.
- Stock Split: If Infosys decides to split its stock, say in a 1:2 ratio, the face value would adjust accordingly. Post-split, each share would have a face value of ₹2.5.
Example: HDFC Bank
Let's consider HDFC Bank with a face value of ₹1. If it announces a dividend rate of 100%, this implies a dividend of ₹1 per share. Despite the bank's shares trading much higher in the market, the dividend is calculated on the face value.
Understanding Through Bullet Points:
Face Value Characteristics:
- Constant Value: Unlike market value, face value doesn't fluctuate.
- Dividend Basis: It's the reference for calculating dividends.
- Stock Splits Impact: Adjusts face value but preserves its reference role.
Face Value and Market Value: It's vital to differentiate between face value and market value. The Market Value is what investors are willing to pay for a stock, reflecting its current perceived value. It can swing dramatically due to various factors like company performance, sector trends, and overall market sentiment.
Conclusion and Further Reading
Understanding face value is foundational for engaging with the stock market. It impacts investment decisions, especially in contexts like dividend payouts and stock splits. For those looking to dive deeper, exploring resources on dividend policies and stock split mechanisms can provide broader insights into strategic investment planning.
Helpful Links for Further Reading: