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Introduction
Face Value in IPO means the value of a company before the stock goes to market. The face value is usually determined by an investment banker's analysis of the company and its prospects. This determines what price per share will be paid for the stock in the IPO face value (Initial Public Offering). Once the face value is established, a price can be set for each share offered in the stock marketplace.
The face value, aka par value, is printed on every share certificate, representing 1/- (one rupee) for each equity share. However, in reality, share prices are generally higher than their nominal value/face value. In IPO, Face value may be defined as - "The original price at which companies issue new shares to investors."
What Is Face Value in IPO?
Face value in IPO refers to the original price, i.e., investors pay when they subscribe to an initial public offering (IPO).
Suppose an investor is buying 100 shares of ABC Ltd. IPO at a face value of Rs.10 per share. This means that he will get Rs.1000 when the company starts trading in the stock exchange. However, once he gets listed on the stock exchange, his shares may trade at Rs.11 each or even Rs.12 each depending on investor demand and supply for each share. In other words, his investment will yield returns for him if there is a price difference between the face value and the actual trading price of each share.
Face Value is the nominal or par value of a security as stated on the certificate. It is also known as the principal value and redemption value. Face Value=Nominal Price
How Are Shares Sold at Face Value?
When you buy a share from the market, you do not buy it at face value. You buy it from a seller willing to part with their share for less than its face value. The difference between the face value and what you pay to the seller is called "discount ."What is the purpose of this discount?
There is a very important reason we have discounts on shares because of only liquidity. Liquidity means how easy it is to buy or sell something.
Companies are valued differently depending on how much new money they have raised and what kind of growth prospects they have. A company's share price can change dramatically from its face value and IPO price when it first hits the market. You should check with your broker before buying stock to know how much money you will be spending for each share.
Face Value vs Issue Price
Face Value in IPO is the price at which the company can sell its shares when it goes public. What does this mean? A company will usually have a pre-determined price per share, which investors will pay when they buy shares of that company. This is called the "offer price" or "issue price."
The primary difference between Face Value and Issue Price is that share prices on exchanges are always higher than their face value and fluctuate daily with supply and demand. This gap between Face Value and Issue Price depends upon various factors such as investor interest, investor perception of the company's growth prospects, the risk involved, etc.
For example, if an investor is buying 100 shares at Rs 10 per share and then selling them a year later for Rs 100 per share, his face value would be Rs 1,000 (Rs 1 lakh).
Calculation of Face Value of IPO
It represents the per-share price and is calculated by dividing the company's total number of shares to be issued by the total number of equity shares outstanding. For example, if a company has 1000 equity shares outstanding and wants to issue 100 new equity shares, the face value will be 10 (1000/1000).
In the case of bonus or rights issues, face value is calculated on a pro-rata basis by dividing the proposed issue size by the existing number of securities outstanding. But in case of an offer for sale (OFS) or buyback, face value and IPO price are calculated on a pro-rata basis using existing numbers of securities outstanding.
As per SEBI regulations, all shares issued in IPO face value have to be sold at Nominal Price, and investors can never buy a share at its Face Value because no one will sell a share at its face value. Though brokers are allowed to sell their unsold shares to clients at face value, they will not do so because they cannot sell shares below the issue price.
Click here to know How is an IPO Valued.
What Are the Different Ways to Determine the Offer Price and Market Value?
In business, face value refers to the value of a company's stock before it goes public. This is also called the par value of the stock. Face value is a theoretical number used to calculate the price at which investors will offer shares when they go public.
After a certain amount of time, companies will decide to make a secondary offering or sell more stock to raise capital for expansion or acquisitions. They do this by putting out another prospectus with updated information and selling more shares at whatever price they set. This price can vary higher or lower than the previous price, depending upon how they feel about the future of their company.
The main difference between the offer price and market value (i.e., face value) comes in a couple of ways:
1- The company may want to keep the share price low to get more investors on board (less demand). On the other hand, they will choose a higher offer price to maximize their sale.
2- The offer price is usually set at a fixed value, but market prices can fluctuate over time. So even if you buy shares at the issue price, there is no guarantee what you will be able to sell them for - some variation is expected.
Wrapping Up
Face value is not an important aspect for an investor who is simply interested in a lucrative investment. However, face-value remains an important concept for a retail investor. To put it in simple words, if you want to become an investor of a company, learning about face values will help you gauge the success your investment would afford you.