Meaning of Face Value?

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Meaning of Face Value(F.V)?: 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, investors must know the important terms. One of the most common terms that are 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.

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 the form of dividends to the shareholders. Furthermore, the company fixes the F.V. of the stock at the time of its issuance. Thus, the investors in the stock market must understand the F.V. of a stock.

Let us now see the importance of the face value of a share.

Importance of Face Value of Share

The F.V. of a share plays a significant role in a company. It is useful for calculations about bonds and preferred stock. Furthermore, the calculation of interest on bonds or preference shares is based on the F.V. of a stock. Moreover, calculations like discounts, premium, market values, yields, etc. are also based on the F.V. of a share.

Let us take an example to understand the importance of face value with more clarity.

How to 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 F.V. 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 F.V. 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 F.V..

The investors in the stock market often confuse the term market value and F.V.. Let us understand the difference between the two.

Difference between M V and F V

The investor in the stock market must know that the F.V. 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 F.V. of a share is fixed. The F.V. of the share is the par value and remain the same as it is specified in the books of the company and share certificate.

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