Introduction
Before appreciating the difference between Face Value and Market Value of a company, let us take a quick moment to understand these definition and their essence in fundamental analysis.
Also Read: Difference Between Market Value And Replacement Value Of A Company
What is Face Value
Face Value is defined as that value of the stock that is provided by the issuer during the incorporation of the company. It is also called the Nominal Value of a company.
It is an arbitrary amount set during the initiation of the company. The Fave Value is used in determining many financial terms in the securities market.
For example, the Equity Capital of a company is calculated by multiplying the face value to the total number of shares.
Equity Capital = Face Value * Total Number of Shares
It is also to be noted that, dividend of the company is generally declared in terms of its Face Value.
For example, 200% dividend declared by the company of a Face Value of Rs. 10 simply translates to 200% of Rs. 10, which in this case is Rs. 20 per share.
What is Market Value
The current price of the stock at which it is trading in the stock market is called the Market Value.
Market value of a stock is dynamic in nature. This means, the market value constantly changes due to factors like demand and supply, economy, performance of the company etc. In other words, Market value is the price at which the share trades in the stock market.
Market value is the true price of the company at which the stock can be bought / sold at a given point of time.
The market capitalisation of a company is determined by multiplying the market value to the total number of shares.
Market Capitalisation = Market Value * Total Number of Shares.
Also Read: What Is The Difference Between Intrinsic Value And Market Value
Difference between Face Value and Market Value
Difference in Terms of Price Change
Face Value of the company are generally static in nature. They do not usually change and are constant. The Face Value of a company only tends to change in case company opts for stock split of consolidation of shares.
On the other hand, Market Value of a company is generally dynamic in nature. This means that the market value constantly tends to change with respect to its stocks demand and supply.
Higher the demand of the stock in the market, higher will be the Market Value of the company and vice versa.
Difference in Terms of Determining Financial Ratios
Face Value of a company is used to calculate financial ratios and measurements like Earnings Per Share (EPS), Price to Earnings (P/E) ratio, and Return on Equity (ROE).
On the other hand, Market Value is used to calculate financial ration like Market Capitalisation, Book Value per share, Dividend yield ratio etc.
Consider the following scenario: Assume you purchase a share of ABC Limited at a Market Price of Rs. 500, having a Face Value of Rs 10.
In essence, this indicates that you have contributed Rs. 10 in exchange for a portion of the company’s stock. The remaining 490 rupees goes toward the earnings of the business.
Profitability can only be achieved by a corporation selling its shares at a premium, or market value, which is more than the face value.
Summarising the difference between Face Value and Market Value
| Face Value | Market Value |
|---|---|
| Nominal value. | Current value. |
| Price is determined during formation of a company. | Price is dependent on market forces. |
| Generally constant and static in static in nature. | Dynamic and changes with time as per demand and supply. |
| Used to calculate Equity Capital. | Used to calculate Market Capitalisation. |
| Represents the original cost of the stock. | Represents the current market price. |
Conclusion
The market value of a company is its true value. This is the value at which the market decides the price of a company.
It is noteworthy to mention that, any change in market value of a company does not have any repercussions on the face value of a company.
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