Hello! I’m back with one more fascinating article on “Understanding Face Value, Book Value & Market Value Series.” I have divided this particular vast topic into different parts. This is my first article in this series. I know these terms might sound fancy for a beginner, but understanding and analyzing companies through these quantities are crucial during the time of investment.
Before moving ahead with the article, I would strongly suggest you refer to my previous articles on finance. I have tried to simplify the finance basics to a better understanding. I have attached the link, please go through them. Likewise, I hope, they add some value to your finance Knowledge.
Before digging into the topic, there are some important terminologies that all need to know for a better understanding of the above-mentioned quantities. Don’t worry, I will try to simplify the concepts as much as possible.
Important Terms and Definitions that You should know before understanding the Above-mentioned quantities.
Promoter: A promoter is a person, who is part of the company since the initial days of company formation. The responsibilities of a promoter include raising capital from different sources and making initial decisions for the company’s growth.
Equity Capital: Equity Capital, also known as shareholder’s equity. It represents the value of the capital that would be returned to the Shareholder after all the company debt was paid off and all the assets of the company are liquidated.
Share: When a company’s capital is divided into a finite, equal number of units.
Here, One Unit = One share.
Tangible Assets: Tangible assets are physical, they include equipment, inventory, cash buildings, etc.
Intangible Assets: Intangible assets do not exist in physical forms like patents, trademarks, accounts receivable, and goodwill.
Outstanding Shares: Shares that are authorized by the company to the public. In other words, we can say, shares that are available on the market for investors.
These are some basic terminology, there are some other keywords to be noted. I will discuss them in this itself wherever there is a requirement.
I know you might be thinking, why Priyanka shared some random definitions, and how they are associated with Investment Decisions?
Don’t worry, I will walk you through everything related to Face Value, Book Value & Market Value, But for now, just understand the above-mentioned definitions briefly because we will be using these terminologies in understanding some major key concepts.
Face Value
To understand face value, I would like to take an example. Suppose, imagine, I want to start a company called X bay. I need 1 crore to start the company. I have 70 lakhs, and I need more, 30 lakhs to start the business. So, I reached around 100+ Promoters for that initial investment. Two of them(i.e, Promotor A & Promoter B) liked my idea and were ready to invest in my business idea 15 lakhs.
I want you to understand the situation now that the Promoters doesn’t invest 30 lakhs without expecting anything from the company. They believed in my business idea, they see a great future for my business idea, and they expect me to give some share rights in the company. So, What I did is, I have 1 crore in my hand. I divided them into 10 lakh shares.
You might ask me that Priyanka, why you have divided into 10 lakh shares, why not 20 lakh shares?
Your question is right and valid. I & other promoters of the company have divided the shares into 10lakh and each share value of cost 10 rupees. Here, we all need to understand one more major aspect, that is, here 10 rupees is not constant. It can change based on the value fixed by the Promoters from company to company. Then I divided the shares among the 10 lakh shares into 3 equal parts(i.e, 7 lakh shares owned by me, 1.5 lakh shares owned by Promoter A & 1.5 lakh shares owned by Promoter B, each share cost of 10 rupees).
Hope you understood, above-mentioned simple case study, If you still have any doubts regarding the case study please feel free to ask your questions in the comment section. Now, let’s define The classic face value definition.
Face Value: Face Value is the most used financial term to describe the initial value of the share or security decided by the Promoters.
In the above-discussed case study, the face value is 10 rupees.
One more point to be noted is face value is constant. But Outstanding Shares(refer to Outstanding shares definition) fluctuate on the decision of shareholders of the company.
That’s all for this article. I will discuss Book Value and Market Value in the next article. I will also take different company’s case studies to make you understand how to analyze the company profits before investing your savings. Feel free to have a discussion with me in the comment section on Face Value and other finance-related topics.
Thank you! Have a nice day :)
