In the past few years, the interest of people in the stock markets has increased tremendously. The main reason for such huge participation in stock markets is owing to its higher returns as compared to other forms of investment. While dealing in the stock market, an individual comes across many different terms. It is important that the meaning of these terms are very clear to investors and traders. Ultimately, your huge investment is at stake and any wrong interpretation of meaning can lead to wrong decisions leading to losson your investments.
One such term that every stock trader or investor must have comes across is face value. The concept of face value is generally applicable to stocks and bonds. Thus, it becomes very important to know what it means. In this article, we shall understand the meaning and concept offace value of a stock.
Meaning of Face Value
Face value is the par value or nominal value of a share of a company. It is fixed by the company during the time of issuance. To put in another way, every company follows the practise of issuing its shares with a fixed value which is known as face value. The company is compulsorily required to retain this legal capital in the business and are not allowed to pay the same to its shareholders in the form of dividends.
As the meaning of face value of shares is known, let us understand the importance of it.
Importance of Face Value of Shares
The face value of shares is critical to an organization. As per the law, a company is required to maintain reserves equivalent to the amount of face value of shares. The reserves are made in order to protect the creditors of the company during the time of crisis. Like for example, if the face value of shares of thecompany is $ 10. In this scenario, the company must maintain a reserve of at least $ 10 for every share issued by it. Therefore, the creditors of the company always have the assurance that they would not lose their money.
The meaning of face value of shares often gets confused with market value of shares. Though in reality, both the terms are different from each other. Let us have a look at the difference between theface value of shares and market value of shares to avoid any confusion.
Difference Between Face Value and Market Value of Shares
The face value is the nominal value of shares and not the actual value. The actual value is also known as the market value. The market value is not determined on the basis of theface value of share but on the basis of demand and supply. Market value is the price level that is reached when the investors are either willing to buy or sell the shares at any period of time. On the other hand, face value is the original price of the shares determined by the issuer. Thus, in no way, the face value and market value of shares are similar to each other.
Even though the investors do not have much to do with the face value of shares, but it is equally important that the investors know the meaning of face value of the share. If the meaning is not clear, often face value and market value become confusing terms for the investors. The real significance for an investor is of market value which keeps on fluctuating depending on the market demand and supply.
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