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Face Value of Shares: What Every Investor Should Know

The face value of a share, often referred to as a nominal value or par value, is the price at which a company initially issues its shares.
face value of shares

Investing in the stock market can be a challenging endeavor, particularly for novice stockholders who are still coming to grips with the concepts and terminology associated with trading. One such concept that often puzzles investors, especially the uninitiated ones, is the face value of shareholdings. Understanding the face value of a share can not only shed light on a company’s share structure but is also essential for carrying out sharp-edged technical analysis.

The face value of share, often referred to as a nominal value or par value, is the price at which a company initially issues its shares. It is the value affixed to the share by the company during its issuance and remains same throughout the company’s life. Importantly, face value has no bearing on the current market value of the share. The face value is the share’s worth during bankruptcy, or liquidation. Companies decided the face value at their discretion, during the Initial Public Offering (IPO). In India, it is commonly assigned in denominations of Rs 1, Rs 2, Rs 5, or Rs 10.

Let’s unpack this further by taking into account the role of technical analysis. An investor looking to conduct a technical analysis will principally focus on a share’s trading patterns and price movements to forecast future trends. Recognising the face value of a share in this context becomes significant when calculating financial metrics such as earnings per share (EPS) and price-to-earnings (PE) ratio. Utilising these metrics, investors can traverse through the complexities of the share’s pricing, making the otherwise complicated world of share analysis significantly more comprehensible.

For instance, let’s talk about calculating EPS. The EPS of a company is calculated by dividing its net profit with the total number of outstanding shares. A company with a net profit of Rs 1,00,00,000 and a total number of 10,00,000 shares will have an EPS of Rs 10. If the face value of shares in this case is Rs 10, the resulting EPS will indeed provide a clear image of a clockwork return on your investment for every rupee invested.

likewise, the face value of a share is used to compute a company’s dividend. For instance, if a company announces a dividend of 200%, it means for a share with a face value of Rs 10, the shareholder will receive Rs 20 as a dividend. Without knowledge of the face value, it would be an uphill task for investors to accurately calculate their returns, which can be detrimental to their overall investment strategy.

Investors should remember that although the face value of a share helps in understanding the issuing company’s financial framework, it does not necessarily dictate the quality of the investment. With the market price of shares often experiencing significant volatility, the face value holds relevance mostly during the share issuance or liquidation phases.

Through knowing the face value of shares, understanding various constituents of share trading as well as added benefits of the efficient technical analysis comes naturally.

However, investing in the stock market always carries inherent risks. Every investor should thoroughly research and analyse before making any investment decisions. The face value is just one piece of the puzzle, and a comprehensive understanding of all variables is key to successful trading.

Disclaimer: This article is intended to provide general information about trading in the Indian stock market. Share trading is subject to market risk, and investors should always carry out their own research and take professional advice before making investment decisions. The figures used in the examples are for illustrative purposes only and are subject to market fluctuations and changes. The face value alone should not guide any investment decision, and investors need to meticulously assess all pros and cons of trading before investing.

In conclusion, while unscrambling the concept of face value of shares might seem daunting at first, with a bit of understanding and patience, it can be demystified. And once decoded, it can lay the foundation for efficient and informed investing. After all, as Warren Buffet said, “Risk comes from not knowing what you’re doing.” Equip yourself with knowledge, and you would have cleared the first hurdle in your investment journey.

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