Personal Finance

What is face value in an IPO ?

February 14, 2021

What is face value in an IPO ?

The face value, also known as the par value or the nominal value, is the fixed value of the share decided by the company when it comes out with an initial public offering(IPO). The IPO is the process by which a company raises capital for growth and expansion.

The company lists the face value as the original value of its stock in its books and share certificates. Furthermore, the face value is always fixed. It never changes. It is a pertinent parameter to calculate the market value of stocks, premiums, returns, etc.

How is the face value determined?

There are no fixed criteria for deciding on the face value of a stock. Companies assign it in an arbitrary manner. It is either Rs. 1, Rs. 2, Rs. 5 or Rs. 10.

Meanwhile, the face value of the stock should not be confused with the issue price of the stock. The issue price consists of an added premium over and above the face value that a company asks of their potential subscribers. In simple terms, the issue price = face value + premium.

Of course, the premium is not something that is decided at random. It depends on the various performance metrics of the company such as sales, profit and volume growth. At times, it is observed that a company offers an issue price that is closer to the face value, which means that the company has asked for minimal premium from its investors.

For instance, a pharma company Pharm-Me has come out with an IPO. It is offering 10,000 shares with a face value of Rs. 10 each. Further, the issue price is Rs. 150. Here, Pharm-Me is asking its potential subscribers to pay the company a premium of Rs. 140, which is over and above its face value of Rs. 10.

How is face value useful?

Companies use the face value of a stock when they announce a stock split. A stock split is when the company divides its existing shares into multiple new shares to boost liquidity, i.e. so that shares can be bought and sold easily and in such a manner that selling does not impact the stock price much, or to make the share more affordable. Simply put, a stock split is a division of the stock’s face value.

For instance, pharma company Pharm-Me’s share price has touched Rs. 3000. Its face value is Rs. 10. To increase the liquidity of the shares, the company split one share into five shares. This means that after the split, the face value of each stock will be Rs. 2, while the share price will come down to Rs. 600.

The companies use face value because it is a fixed value that is unaffected by market conditions and the company’s performance.
Companies also use the face value of the stock when they are calculating the dividend. The dividend is a part of the annual profit the company makes, which it distributes among its shareholders.

For example, pharma company Pharm-Me has a face value of Rs. 10 and is currently trading at Rs. 3000. It has just announced a dividend of 10%. This means the company is all set to distribute a dividend of Rs. 1 per share and not Rs. 300.

What is the difference between face value, market value and book value?

As discussed above, the face value of a stock is the fixed value of the stock arbitrarily decided by the company when it comes out with an IPO. The face value remains unaffected by market conditions and remains static.

On the other hand, the market value of the company is the current price at which the share is being traded in the stock market. This is continuously changing due to demand and supply conditions of the share or changes in macroeconomic conditions, international events, or government policies.

Book value stands for the net value of the company as specified in its books. In theory, it pertains to what investors will get if the company gets liquidated, i.e., after the company sells all its assets and pays back all its debts and liabilities.

Conclusion

A general understanding of terms such as face value, issue price, market value, and book value helps investors. For instance, when we talk about the face value, corporate actions such as stock splits and dividends are dependent on it.