We listen Several times that this company split its share. Now the face value of this share becomes 5 from 10 or 2 from 10 or 1 from 10. The question arises why a company split its share and what is the face value in splitting the share and can any company increase the face value of any share again after splitting it for once. Let’s Understand what is the face value of a stock
What is a Face Value of stock/Share?
Face Value is also known as Par Value. Face Value is the Original Value of Share in Share Certificate. Face Value is only used in calculating the Total Number of Shares a Listed Company Can issue and the Equity Capital a company should have in reserved before considering for dividend. Let’s Understand it with an example-.
Suppose you have opened a company and you have registered that company. Now you have a registered company and you need to infuse minimum capital in that company and that initial money is infused by directors of the company. Since your company is a listed company so the capital which directors/promoters have infused in the company initially is the minimum capital that should be maintained in the company. Also, you will issue some share in the exchange of the infused capital. That issued share will be available in the market for trading. Suppose directors have infused 20 crore rupees initially as equity capital and issued 2 crore shares in exchange for infused capital so that you can trade with that shares. So Face Value of share will now be Rs.10. or Equity Capital= Face Value* Number of issued shares.
Face Value is only used for calculating Equity Capital
Why Face Value of Most of the Companies are 10 or 5?
Nowadays, Many Companies have a Face Value of 10 or 5 the reason behind this lower face value is the Dividend is paid in terms of Face Value. Means Companies have to pay the dividend in keeping Face Value in Mind. This means that if a Company has the face value of Rs10 and that company announces the dividend of Rs 20 per equity share. So Company will say that 200% of Face Value will be paid as a dividend. Just for the dividend companies nowadays have a lower face value of the share.
Companies split share only to increase the liquidity of share. Suppose the Share Price of a company is Rs 10,000 and face value 10. Since the Share Price of the Company is very high and retail investors are not entering in this share and this price is constant for 1-2 years. Now the company has decided to split its stock and decrease the face value to 1 which means that 1 share of face value 10 of a company is now split into 10 shares of Rs 1. This means the share price of Rs 10,000 will now be Rs 1,000. This will help in more liquidity in the market for this share. and more and more people will invest in that stock.
Does the face value of the share can be increased again after the split.
No, if the company split the share price for once. The company can only further split the share it cannot increase the face value of the share. Splitting of share is done only till the share attains the face value of Rs 1. For example, if any company split the share from Rs 10 to Rs 2 then the company does this to increase the liquidity of the share in the market and also to increase the demand of the share. Then why the company will increase the face value of the share. So face value cannot be increased again after the split.