Face Value of A Share and its Importance
Published by Sharekhan Education | October 10, 2020
Face Value of A Share and its Importance
Face value is the nominal price of the share. It can be of denomination Rs.1, Rs.2, Rs.5, and Rs.10 and in rare cases Rs.100. Its purpose is to calculate the share capital of the company. For example, the total outstanding shares that the company has issued to all shareholders (including promoters) is 10 crores, and the face value is Rs. 10, then the share capital of the company is Rs.10 X 10 crores = Rs.100 crores
When shares are issued to the shareholders, it can be at face value, a premium to the face value, or a discount to the face value.
Importance of Face Value:
The face value of the company does not change unless there is a split or consolidation of shares. During a split, the face value of the company gets reduced and during consolidation, the face value increases. For example, if the investor holds 1 share of face value Rs. 10 and the company decides to split the face value from Rs.10 to Rs. 2, then, the investor will be holding 5 shares of Rs.2, post the split.
Face Value also serves the purpose of representing the dividend payable. Whenever a dividend is declared, it gets represented in terms of face value. For example, a dividend of 30% on a share with the face value of Rs.10, means that the company will pay 30% of R.10 = Rs. 3, as the dividend per share to the shareholders. But, when a company declares a dividend of 30% on a face value of Rs.2, then, it means that the company will pay 30% X Rs.2 =Rs.0.6 per share to shareholders.
Misconception:
There is a common misconception that a share of Rs.10, when valued by the market at Rs.1000 or more, becomes overvalued. This isn’t correct as the price of the share is dependent on factors such as growth in earnings per share, book value, quality of management, etc.
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