Face value vs Book value vs Market value of Shares

When you start investing in the stock market, some stock market terminologies are frequently used. Terms like ‘Face value’, ‘Book value’, and ‘Market value’ of shares are widely used while discussing many topics related to the stock market. Investors should try to understand the concept of these terms. They should also try to understand the meaning and practical usage of these terms.

Face value vs Book value vs Market Value

Face Value of Shares:-

The value of the share that is listed by the company in its share certificates and books is called Face value. It is also called “par value”. The face value of shares doesn’t change with the fluctuation of Stock price in the Market. In fact, the face value of the share never changes in the entire life of the company. The face value of the share changes only when there is a split in the company’s shares. The face value is calculated by the below formula.

Face Value of Stock = Equity Capital ÷ Number of Outstanding Shares

The face value of a share is calculated by dividing Equity Capital by the Number of outstanding shares. We will try to understand this concept by taking the following example.

Example:- Suppose some Promoters started a Company called ‘FFA’ and they put an initial capital of Rs. 1 lakh. They decided to break that capital of Rs. 1 lakh into Shares of 10,000.

So, the face value of a share of the company ‘FFA’
will be 1,00,000 ÷ 10,000 = Rs. 10/-.

Premium on Shares: –Suppose, promoters decide to go for a public issue (IPO) and they decide to offer it to the public at Rs. 200/- per share. So, for one share of the company ‘FFA’ having face value ( Rs. 10/- ) investor has to pay a premium of Rs. 190/-.

Rs. 200/- is the issue price of the company’s share.

Why Face value is important:- When a company announces the dividends, it is always calculated at the face value of shares and not on the current market price. Face value is useful in calculating the premium on shares. Also, in the case of the split of shares, the Face value of the company becomes important.

Book value of Shares

Book value is different from that of Market value or face value. If a company goes
bankrupt, then the investor will get the money as per the book value of the share and not as per the market value of a share. After the bankruptcy of the company, all its Assets were sold, and all liabilities were paid off. The remaining money is equally distributed among the investors. Book value is the amount of money per share an investor will get in case of liquidation.

We will try to understand the concept of ‘Book value of shares’ by taking the following example. For that, we will again consider a company called “FFA” having the following details.

Asset = 20 Cr
Liabilities = 10 Cr
Equity Capital = 3 cr.
Reserves = 7 Cr
Total Shares = 10 Lakhs

There are two formulas for calculating the Book value of stocks.

Formula 1. :- Book value = Total Assets – Total Liability ÷ Total Number of shares

Book Value = 20,00,00,000 – 10,00,00,000 ÷ 10,00,000

Book Value = 100

Formula 2. :- Book value = Equity + Reserves ÷ Total Number of shares

Book Value = 3,00,00,000 + 7,00,00,000 ÷ 10,00,000

Book Value = 100

By using both the formula, the Book value is 100.

Book value plays an important role in deciding the company’s valuation. If the book value per share is higher than the market value of a share, then it indicates that the company’s stock is undervalued. And if the book value per share is less than the market value of the share, then it indicates that the company’s stock is overvalued.

Market Value of Shares:-

It is the price at which a stock is currently trading in the stock market. The market value of shares keeps on fluctuating in the market. Investors buy and sell stocks at the Market value. In other words, it is the price that investors are ready to pay for 1 unit of the company. The market value of shares keeps changing as per the demand and supply of shares in the market.

If the market value of the stock is more than its face value, then it is said that the stock is trading at a premium price.
If stock is trading at the same price as of face value, then it is called that the stock is trading at par.
If the stock is trading below its face value, then it is said that it is trading at a discounted price.

The higher Market value of shares indicates the growth and prosperity of the company. Higher Market value shows that the Company is doing well in Business. Investors have full faith in the Company’s management. The company has a reputation and goodwill in the market.

Conclusion:

All three terminologies, Face Value, Market Value, and Book Value, are important in understanding stock market scenarios. Face Value is the initial value of a share when the company is formed. It is mainly used for calculating dividends, premiums, and Share splits. From the Investor’s perspective, market value is the most important because it tells us the current price of a share in the stock market. The investor can find out the current value of their investment by using the Market value of shares. Book Value is important in deciding the valuation of the company. If the Book value is more than the Market value, it indicates an undervalued stock. If the Book value is less than the Market value, it indicates an overvalued stock. Book value is used to calculate the PB Ratio.

The formula is PB Ratio = Current Price of Share ÷ Book Value of Share

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