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How Face value is different from Investment Amount

31 May 2023

To understand the difference between face value and investment amount, we must first understand the different terminologies associated with face value, bonds, and stocks.

What is the Face Value of a Share?

  • It's important to understand the face value of a share in the market if you plan to invest. The term 'face value' refers to the nominal value of a security as mentioned in its certificate. Since publicly traded firms offer their stocks through initial public offerings, the face value remains fixed.
  • It's the minimum value at which a stock is up for purchase or sale and is determined when the company’s stock is first issued.
  • It's also known as the 'par value' of a stock. If you buy a company’s stock, the company would pay you this par value, usually through a cheque to your name.
  • The face value also indicates the current market price of a share. It tends to rise when a company announces a positive development regarding its new products, and vice versa.
  • The face value differs from the current price of a stock. This difference is due to the accrued interest from the date of the price change and the trading fee charged by your broker. 

 

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What is the Market Price of a Stock?

  • The market price of a stock refers to its current value as displayed on the stock exchange.
  • The market price can fluctuate because of the price of the equities purchased.
  • Government policies, macroeconomic data, supply and demand, global events, and other market conditions can affect this value too.
  • The stock market price can also change dramatically over time.

What is Accrued Interest?

  • The term 'accrued interest' refers to the amount of interest earned on any loan, such as a bond, but not yet collected. 
  • This interest adds up from the date the bond is issued or when the coupon is made.

How is Face Value Different From the Investment Amount?

In simple terms, face value can be defined as the price at which a share or bond unit is issued in the market. However, the price at which the share is traded in the market is called the market price. The investment amount refers to the total amount that an investor pays to purchase a bond or share. It can be calculated by adding the market price and accrued interest.

What is the Significance of Face Value?

The face value is important if you are looking to invest in stock exchanges, shares, and bonds. It's necessary to determine financial ratios and calculate earnings per share, return on equity, and the price-to-earnings ratio. The face value can also help understand the increase in a company’s capital since the issuing of shares.

Face value has some key roles, which are given below :

  • It helps determine the share’s present market value.
  • It helps in calculating the premium for the company.
  • It's an important aspect when calculating the interest rates for the stock.
  • It's useful in calculating the profits earned by the bond.

Conclusion

  • The face value of any share is the first price listed by the company when it is issued.
  • As trading continues, interest is accrued on it, and the subsequent value of that share becomes its market price.
  • When any investor is looking to invest in shares, he must pay the investment amount, which is the amount required to buy the share. It is the current market value, and the accrued interest.

FAQ

1. Why do bond prices fluctuate?

The bond price or settlement amount shown on any company’s website constantly changes because of its accrued interest and market value. Just as the accrued interest accumulates daily, the market price also changes every day; they are both affected by several factors.

2. What is the formula for the face value of a stock?

Face value of a stock = equity share capital / outstanding share numbers

3. Is it possible to modify or change the face value of shares?

Yes, the face value of shares can be modified or changed by corporate actions, such as stock splits. In stock splits, the value of the stock will decrease as the current shares are divided or split into several subunits.

 

 

 

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