What Is Face Value in ipo? Face Value VS Market Price

The concept of face value and its relation to the issue price in the stock market. The face value, or par value, is indeed the fixed nominal value of a share determined by the company when it goes public through an IPO. The issue price, which includes this face value along with a premium, is crucial for investors to understand when considering an IPO investment.

The premium added to the face value reflects the company’s assessment of its own performance and growth potential. Companies with a strong track record and promising future tend to set a higher premium, while those facing challenges may keep the premium closer to the face value to attract investors.

Investors should carefully evaluate the issue price, premium, and the company’s overall financial health before making investment decisions in an IPO. Understanding these fundamentals is essential for making informed choices in the stock market.

Before delving into the concept of face value (FV), it’s important to have a clear understanding of what an Initial Public Offering (IPO) is.

An IPO occurs when a privately held company offers its shares to the public to raise capital through the stock markets. It’s the process through which a private company transitions into a public one by initially issuing shares to the general public. Typically, a corporation undertakes an IPO to secure funds for expansion or to provide existing shareholders with a means to enhance the value of their investments.

When a company issues shares during an IPO, they are typically offered at a price above their face value. This means that the market perceives the company’s worth to be greater than the nominal value of its shares. Selling shares at a premium signifies that investors are willing to pay more than the face value for them.

To clarify, here’s the relationship expressed in the equation: Issue Price = Face Value (FV) + Premium.

Now, let’s dive into what face value means in the context of an IPO. The face value represents the fixed price assigned to each share that a company chooses to offer in an IPO. This value can be any amount, such as Rs. 2, Rs. 10, or Rs. 1000, and it is determined after careful analysis by investment bankers. The face value is the foundational price at which companies issue new shares to investors and is recorded on the share certificate.

The premium, on the other hand, is not arbitrary; it is influenced by various factors that reflect the company’s performance, including its sales, profits, and growth. In some IPOs, the issue price is set close to the face value of the shares, making the concept of face value crucial in this process.

What does stock split means?

A stock split is a corporate action in which a company decides to divide its existing shares into multiple new shares. The primary purpose of a stock split is not to improve the volatility of a stock but rather to adjust the share price and the number of shares outstanding without changing the overall market capitalization of the company. Stock splits are typically done to make the company’s shares more affordable and liquid for investors.

Here’s how a stock split works:

1. Announcement: The company announces a stock split and specifies the ratio by which the shares will be split. Common stock split ratios include 2:1, 3:1, 4:1, and so on.
2. Execution: After the announcement, the stock split is executed on a specific date known as the “effective date.” On this date, existing shares are divided into the specified number of new shares according to the announced ratio. For example, in a 2:1 stock split, each existing share is replaced with two new shares.
3. Adjusted Share Price: As a result of the stock split, the share price is adjusted proportionally. If, before the split, a share was trading at $100, and there is a 2:1 split, the share price after the split would be $50.
4. Number of Shares: The total number of outstanding shares increases. In a 2:1 split, for every share an investor held before the split, they now have two shares, but the overall value remains the same.

Stock splits are typically seen as a way to make a company’s stock more attractive to a wider range of investors, especially those who may have found the stock price too high before the split. It does not change the fundamental value of the company but can lead to increased trading activity and liquidity in the stock. Additionally, stock splits can be seen as a sign of confidence by the company’s management in its future prospects.

Here’s why face value is important:

1. Useful in Stock Splits: After a company’s shares are listed on the stock exchange, their prices fluctuate based on market conditions and company performance. To make shares more affordable for retail investors, companies may announce stock splits. For example, if a company’s stock has a face value of Rs. 10 and the market price reaches Rs. 3,000, a 1:5 stock split would result in each share having a face value of Rs. 2 and a market price of Rs. 600.
2. Facilitates Comparison: Investors can use the face value to calculate the premium percentage that a share commands in the stock market. The premium is calculated based on the face value using the formula: Premium = Market Price – Face Value.
3. Dividend Distribution: When a company distributes its annual profits to shareholders in the form of dividends, the face value plays a role. Dividends are often announced as a percentage of the face value. For instance, if a company like the Tata Group declares a final dividend of 20%, and the market price of its shares is Rs. 3000 with a face value of Rs. 100 per share, the dividend amount would be calculated as Rs. 20 per share (100 * 20%).

To calculate the face value in an IPO, a company can determine its net worth by subtracting its liabilities from its assets. Then, it can divide this net worth by the number of shares it intends to issue. For example, if a company’s net worth is Rs. 1000 and it plans to issue 100 additional shares with a face value of Rs. 10 each, it would calculate as follows: Rs. 1000 (net worth) ÷ 100 shares = Rs. 10 face value per share.

Face Value vs Market price

Aspect	Face Value	Market Price
Definition	The nominal or fixed value assigned to a share by the issuing company during an IPO or at the time of creation.	The actual current price at which a share is traded in the stock market.
Determined by	Decided by the company and mentioned on the share certificate.	Determined by the forces of supply and demand in the stock market.
Fixed or Variable	Typically a fixed value, e.g., Rs. 10 or Rs. 100.	Constantly changing and can vary from moment to moment.
Reflects	Represents the minimum value of a share as per the company’s accounting records.	Represents the perceived value of a share in the open market.
Premium Calculation	Not used in premium calculations.	Used in premium calculations. Premium = Market Price – Face Value.
Role in Dividends	Used to calculate dividend percentages. Dividends are often declared as a percentage of face value.	Not directly used in dividend calculations. Dividends are declared as a fixed amount per share or as a percentage of face value, market price, or both.
Role in Stock Splits	Used to determine the new face value after a stock split.	Not directly involved in stock split calculations. Stock splits are typically based on ratios (e.g., 1:2, 1:5) and affect market price directly.
Example	Face Value = Rs. 10; This is the fixed value stated on the share certificate.	Market Price = Rs. 1,000; This is the current trading price in the stock market.