face-value-in-an-ipo

Face Value in an IPO

Face Value in an IPO

IPO stands for Initial Public Offering is a process in which a private company goes public by issuing shares to the general public for the first time.
The company which offers its shares to the public is called an “issuer,” and it does with the guidance of several investment banks. Once the IPO is done, the company’s shares are traded in an open market.
The primary reason for a private company going to the public is to raise money. By selling its shares in open market, the company can collect and raise funds to grow its business successfully.

Several investors in the stock market are well-versed in terms like ceiling price, floor price. However, some investors don't know what face value means in the stock market.
The face value, also known as par value, is the fixed price of the particular share decided by the company to come out with an Initial Public Offering (IPO). The face value can be any value like INR 2, INR 10, or INR 1000.
The issue price, also called price band, is the stock's face value plus the premium that a company demands to charge from its investors.
In simpler words,
The issue price of the share = Face Value of the share + Premium asked by the company on the share.
Now one essential thing that all investors need to know about the premium decided by a particular company is not done on a random basis.
The company sets the premium based on several performance matrices like past financial performance, profit, stability, and future growth potential.
However, the company that is not performing well in the stock market sets the issue price near the face value to attract and gain potential investors to invest in their company.
On the other hand, the companies that are performing exceptionally well in the stock market are pretty confident that their investor will keep bidding the price band above the face value.

When a company announces a stock split at that time, they use the face value of a stock. A stock split means a company decides to divide its existing shares into multiple areas to improve the volatility of a stock.
These shares can be purchased and sold in a manner to make the share more affordable without having any impact on stock price while selling.
In simpler terms, a stock split is the separation of stock's face value.
For instance, an established company named Reliance Industries share price has touched Rs. 5000. Its face value is Rs. 10. To increase the liquidity of the shares, the company will split its one share into five different shares. This means that after the division, the share price will come down to Rs. 1000 and the face value of each stock will be Rs. 2.
The fixed value is unaffected by the company's performance and market conditions, and due to this, a company uses face value.
Apart from performance and market conditions, the company uses the face value of the stock while calculating the dividend.
The divided means a part of the annual profit that the company makes, and later on, it is distributed to the shareholders of their company.
For example, Reliance industries have a face value of Rs. 10 and are currently trading at Rs. 5000. It has just announced a 10% dividend which means the reliance industries are all set to distribute a dividend of Rs. 1 per share and not Rs. 500.

As we have already told, the face value of a particular stock is a fixed value of a stock that is decided by the company and later on, it is executed along with an IPO.
The face value of a company remains stable and unaffected by market conditions.
On the other hand, the market value means the share of a company is traded at the current price in the stock market.
Due to changes in government policies, macroeconomic conditions, international events, the current price of the share keeps on changing.
Book value refers to the net worth of the company, which is mentioned in its book. It concerns what all its investors will get after the company sells its assets and pays all its liabilities and debts.

  • What is an IPO?
  • IPO stands for Initial Public Offering is a process in which a private company goes public by issuing shares to the general public for the first time.

  • What is Face Value in IPO?
  • The face value, also known as par value, is the fixed value of the share decided by the company and later on it comes out with an initial public offering (IPO). The face value can be any value like INR 2, INR 10, or INR 1000.

  • What does stock split means?
  • A stock split means a company decides to divide its existing shares into multiple areas to improve the volatility of a stock.

  • What is the minimum and maximum value of a share?
  • The minimum face value of a company’s share is RS 1 while the maximum value can be any price that is decided by the management. However there is no maximum value of share that is fixed by the SEBI.

  • What does market value and book value means?
  • The market value means the share of a company is traded at the current price in the stock market. On the other hand, book value refers to the net worth of the company, which is mentioned in its book.

Final Thoughts

Before starting a trading journey, every investor should be well-versed with the company's face value and market value.
However, there are several other technical terms, but an investor should clearly understand these terms.
Based on the face value, several actions have been taken by the listed companies, and hence an investor should have some information about these actions.
Thus, a general understanding of face value, issue price, book value, and market value will help investors to perform better in trading.