Definition
The nominal value of shares, also known as face value or par value, is the fixed price assigned to each share by the company when they are first issued. It does not reflect the actual market value of these shares. Instead, it is used to calculate the company’s authorized capital and does not change over time regardless of the volatility of the share price in the stock market.
Key Takeaways
- Nominal Value of Shares, also referred to as the par value or face value, is the price at which the shares were originally issued by the company. It is the value stated in the corporate charter beyond which the company cannot receive funds for issuing shares.
- The nominal value has no direct relation to the current trading price or market value of the shares. Market value typically fluctuates based on supply and demand in the market, while the nominal value remains constant.
- A company can not sell shares below the nominal value. In case they want to issue shares at a price below the nominal value, they must adjust this value to avoid insolvency or negative equity.
Importance
The Nominal Value of Shares, also known as par value or face value, is a significant financial term because it represents the minimum price at which a company can issue its shares, which lays the foundation of a company’s authorized capital.
It designates the value of the share as stated in the company’s articles of association, and often serves as a benchmark for the company when issuing dividends or calculating capital for legal purposes.
It’s crucial to note that this value is not necessarily indicative of the market value of the shares, which can fluctuate based on demand and other factors.
Understanding the nominal value is important for investors, as it can be indicative of the company’s financial health and stability.
Explanation
The nominal value of shares, also known as par value or face value, serves as a benchmark in determining the minimum price at which shares will be issued by a company. Initially, it was used as the lowest price to protect creditors in case of insolvency. In today’s corporate world, it serves a more administrative purpose and is used in legal documentation during the incorporation of a company or when shares are issued.
It is pivotal in determining the share capital of a company, as it is multiplied by the total number of shares issued. Apart from this, the nominal value of shares is also significant when it comes to calculating dividends for shareholders. Some companies use the nominal value to determine the proportion of profit to be distributed among shareholders in the form of dividends.
This is especially true in the case of preference shares, where dividends are often a fixed percentage of the nominal value. Moreover, when a company goes into liquidation, it is the nominal value of shares that dictates the minimum amount that must be returned to shareholders. Therefore, the nominal value of shares helps in maintaining transparency and fairness in corporate financing.
Examples of Nominal Value of Shares
Company A issues its shares with a nominal value of $1 each. This means that when these shares were initially issued, they were priced at $The total nominal value of shares is the product of the number of shares issued and the nominal value of each share.
In another scenario, Company B had 100,000 shares with a nominal value of $50 per share. So, the total nominal value of all shares would be $50,
For another example, say Company C during its establishment decided the nominal value of its shares to be $Even after years of business, when the market value of each share could be $100 or more, the nominal value of its shares still remains $
This is because the nominal value does not change with market conditions.
FAQ: Nominal Value of Shares
1. What is the meaning of nominal value of shares?
The nominal value of shares, also known as the par value, is the value assigned to the shares when they’re issued by a company. This figure is stated on the face of the stock certificate and represents the lowest price at which the company may sell these shares.
2. Is nominal value of shares equal to market value?
No, the nominal value of shares is not equal to the market value. The market value of a share is the price at which it is traded in the market, which is determined by the supply and demand factors for that particular share. Nominal value, on the other hand, is a fixed value determined at the time of issue.
3. What is the use of nominal value in shares?
The nominal value in shares is used to calculate the legal capital or issued capital of a company. The issued capital of a company is simply the total number of shares issued multiplied by the nominal value of each share.
4. Does the nominal value of shares change over time?
No, the nominal value of shares is a value assigned at the time of issue and does not change over time. It is not affected by changes in market price or any other factor. It remains static until the company decides to change it through procedures specified in the company’s bylaws.
Related Entrepreneurship Terms
- Par Value of Shares
- Market Value
- Share capital
- Equity Valuation
- Dividends
Sources for More Information
- Investopedia: A leading financial education website providing a wealth of resources to help individuals understand and navigate the financial world.
- The Balance: Offers expertly crafted financial advice and information for those aiming to make more informed monetary decisions.
- CNBC: A recognized world leader in business news, providing real-time data, analysis and information covering the global markets and business economy.
- Morningstar: An investment research company providing software and data platforms for investment professionals, including equity, credit and mutual fund analysis.
