Face value is a term that’s used in all walks of life. But in the world of finance, it has a very specific meaning – one that both new and seasoned investors should be familiar with. Many entrepreneurs and business owners turn their hands to the world of investment. Their experience, knowledge of the market and ability to make snap decisions based on available data all lend themselves well to a successful career in trading. As trading platforms become more accessible to newcomers, virtually anyone can try their luck as an investor.
However, there’s a lot of esoteric lingo that you’ll need to grapple with when starting out. Including terms like face value. What does face value mean in the world of finance? And how does it relate to other security values like par value or market value? What’s more, why is it important for business owners to understand face value, whether they trade stocks or not?
What does face value mean in trading?
The term face value is often used in the world of securities trading. It’s also fairly common in the insurance world. The face value of an asset represents its value as stated by the institution that issues it.
Physical commodities like coins, notes or stamps have a face value that is typically equal to their nominal value. A pound coin, for instance, usually has the monetary worth of one pound. However, a very rare coin like the Kew Gardens 50p will have a significantly higher market value than 50p. Yet, you could still spend that same 50p on a bar of chocolate at your local corner shop.
In insurance, face value represents the amount paid out to your beneficiaries when you die.
Face value in trading stocks and shares
The original cost of a stock is referred to as the face value. This is the number that is shown on the share certificate. When dividends are paid to shareholders, these will be expressed as a percentage of the stock’s face value.
A company’s legal capital is actually based on the cumulative value of all its stock shares. Only capital above this face value can be released to investors as dividends. Think of the funds that cover the face value as a default reserve.
There are no legal requirements stating what face value businesses are required to list upon issue of securities. As such, businesses can (and do) tend to use very low values to determine the size of this default reserve.
Face value in trading bonds
The face value of a bond is the amount that the issuer provides to the bondholder when the bond has reached maturity. In this context, the term face value and par value are used interchangeably. The face value is used to determine a bond’s interest rate or “coupon value”.
If interest rates change to a value that exceeds the bond’s coupon rate, it is sold at a discount. This is known as selling below par. Likewise, if interest rates should fall below the bond’s coupon rate, it is sold at a premium, or above par.
Face value vs market value
It’s important to note the difference between face value and market value, as these can often be very different. Think of our previous example of the Kew Gardens 50p. The face value of a commodity or security is attributed by the issuer, while the market value is determined by supply and demand.
As such, there can often be a sizeable gulf between the face value and market value of a commodity.
Why is it important to understand face value?
If you own a publicly traded company, you’ll need to know the face value or par value of your company’s stocks. Not only is this important for reporting, your company is also unable to declare dividends to its shareholders that may reduce its capital to less than the amount dictated by your face value reserves.
An understanding of face value is also important to traders in order to comprehend the true market value of securities.
We can help
If you’re interested in finding out more about face value, investments, or any other aspect of finances then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.