What is Face Value? : The Stock Market has been getting a lot of attraction from the investors. In fact, the ability to generate higher returns in the stock market is a contributing factor. Moreover, to make good money in the stock market, the investors must know the important terms. One of the most common term that is heard by the investors is ‘face value of a share’. In this article, we shall understand the term ‘face value’ of a share in detail.
What is Face Value? [ Meaning of Face Value ]
The face value of a share is also the par value of a share. In fact, it is the legal value of the share. Since it is the legal value of a stock, the company must not pay it in form of dividends to the shareholders. Furthermore, the company fixes the face value of the stock at the time of its issuance. Thus, the investors in the stock market must understand the face value of a stock.
Let us now see the importance of face value of a share.
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Importance of Face Value of Share
The face value of a share plays a significant role in a company. It is useful for calculations in relation to bonds and preferred stock. Further more, the calculation of interest on bonds or preference shares is on the basis of the face value of a stock. Moreover, calculations like discounts, premium, market values, yields, etc. are also on the basis of face value of a share.
Let us take an example to understand the importance of face value with more clarity.
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How Face Value of Share Works
Suppose ABC Ltd. decides to raise capital by issuing bonds. The bond issue is to raise Rs. 10 crore. Suppose the face value is Rs. 100, the company shall issue 10 lakh bonds. Now, if the company will have to pay 5% interest on its bond, then it would mean that it would have to pay 5% interest on the face value of Rs. 100 every year. Therefore, the annual value of interest on the bond shall come to 10,00,000 * 5% i.e. Rs. 50,000 with Rs. 100 as the face value.
The investors in stock market often confuse the term market value and face value. Let us understand the difference between the two.
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Difference between Market Value and Face Value
The investor in the stock market must know that the face value and market value of share are different from each other. In fact, the market value is one that changes with the market conditions. On the other hand, the face value of a share is fixed. The face value of the share is the par value and remain the same as it is specified in the books of the company and share certificate.
Right-now , We hope that you understood our blog title of ” What is Face Value ? ”
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