Why is Face Value Important

[aj4567]

I have done lot of googling, but still coulnt find answers. So, here are my queries.

1) Face value is used for Calculating dividends and indicating if the stock has split. Any other significance.
2)Imagine two comanies with same Market price, but with different Face values - one with Rs10 and other with Rs.1 are the same. Many say it is good to go for the share with higher Face value. Why is that?
3) Are shares sold ate the Face value during IPO?

 

[Mr.G]

1) There is no other significance other than what you have mentioned.
2) Face value is of no concern when buying shares. Shares are bought based on intrinsic value. Stocks with higher face value can be split and can't be split after they hit one.
3) IPO shares are sold at premium from share value to reflect intrinsic value.

 

[aj4567]

Thank You G.

Instrinsic value is the same as the Book Value rite (i.e) (NET WORTH)/ (TOTAL NO. SHARES).

Also, Can some one let me know why they tell Face Value is important here
http://businesstoday.intoday.in/story/the-facevalue-trap/1/4324.html.


Thanks!

 

[Mr.G]

No book value is different market value is different face value is different and insintric value is different.

Book value is the total of real assets a company has

Market value is at which you can buy sell the share on exchange

Face value is the denomination used on shares for legal purposes.

Insintric value is the basis of all fundamental analysis. It is the value of a share derived by an investor or institution, through scientific and qualitative methods.

I have absolutely no Idea why these people are scaring retailers with all that BS. Face value comes to order when the firm declares bankruptcy. And in 99% cases the investors get nothing and in 1% case the company goes under reorganization and investors get the liquidation value of the company.

 

[rvm123]

Ans to Qtn No.2: When you buy a gold coin from market, you will pay more for 10gms coin than 1gm coin. This is similar to that.

Ans to Qtn No.3: Earlier (during and upto early 90's) most of the IPO's were at face value. If the issue was from reputed groups, it may attract some premium, which is to be approved by SEBI. But not, because of book building process, all companies can issue at premimum.

 

[jamit_05]

I have done lot of googling, but still coulnt find answers. So, here are my queries.

1) Face value is used for Calculating dividends and indicating if the stock has split. Any other significance.
2)Imagine two comanies with same Market price, but with different Face values - one with Rs10 and other with Rs.1 are the same. Many say it is good to go for the share with higher Face value. Why is that?
3) Are shares sold ate the Face value during IPO?

I had similar questions after I interviewed a veteran, moderately successful investor. He laid a lot of importance to FV. When I asked, he did not give a direct explanation. But, I felt as though he knows the answer but is unable to articulate it.

Later, when I was replaying the interview in my head I realized what he was trying to tell me. But, I was looking for specific vocabulary hence I missed out.

Consider two real companies HuL and Tata Steel. They both started with FV of Rs.10, but HuL now has FV of Rs.1;

This is a result of HuL making splits. As a result the number of shares floating has increased 10 fold. ANd that is a very big increase.

And how does that affect the investor?
Well, investors track EPS. Meaning, if he has to chose between companies to make money in the bull run, he will bet on the one having a higher EPS... this may not be the best logic, but the mass-logic and hence powerful.

So, HuLs EPS will be (much) lower at FV of Re.1 than it would have been at Rs.10

But, yet the companies do it... why?
It works in their favour. When the price of a share goes up over the years, it becomes too "big" to trade. An ordinary investor/speculator prefers smaller denominations.... again no sound logic, but mass-logic hence powerful. Therefore, to attract more trading volume the Company has to reduce the per share price. This can be done via Bonus or Split. And companies do both. Bonuses do not affect the FV, but Splits do. They also have different effects on the balance sheets.

The companies also have to keep track of their competing scrips to not have much disparity.