Definition - IPO, Face Value, Premium and Market Price


Definition of the terms like Face value, initial public offering, Share price etc used share market.

Hi All,

However this is very basic terminology but many of investor does not know this.

Here is the detailed explaination for basic question.

> What is a book building IPO?
IPO is initial public offering where if any company wants to increase their capital then the company will launch IPO through which it issue shares in market and they will get the money which will help them out in expanding their business.

A book building process is where the shareholders invest in IPO directly from open market there is no other way to do so. It brings transparency to investors and the share allocation will be basis on lottery system or some systematic process.

A company will fix a price band according to their financial results over the last year and expecting results for coming years. This price band consists of total price (face value + premium)

>Face value
To understand this term I will take one example to make this to you understand in a easy and proper way. Face value is basic price of a share that is generally 10 Rs per share. Except that face value can be 1 Rs, 2 Rs, 5 Rs, 100 Rs and rarely 1000 Rs.
Lets take and example of Adani Power where the IPO price band was 90 to 100 Rs and the final price was 100 Rs.
The face value of share is 10 Rs, and rest is 90 Rs which is called as Premium. So the simple formula to understand this concept is:

Total Share price = Face value + Premium

Now the question here is Why is it necessary to have a face value for each stock and why face value is kept?

To understand this concept I will take one more example.

A company Reliance Industry whose face value is 10 Rs and total price is 2000 Rs. A small and medium investor like you and me will think ten times before investing in that share as the price is too high and high risk is involved to loose money.
So if reliance wants then it can split the share into face value of either 1,2 or 5 so it will result the share price 200, 400 and 1000 Rs respectively.
After splitting the face value the share price will decrease in same ratio and total number of shares will also increase in investors’ account.
After doing this the share is in range of medium investor who also can think for investing in Reliance share.

If you will see any share it will be having different – different face value depends on company’s policy.

I will give you some examples of companies with different face values. You can check those in any website.

Face value : 5
- Infosys Technology
- Maruti Suzuki

Face value : 2
- Suzlon Energy
- Hero Honda
- L&T

Face value : 1
- Sesa Goa
- TCS

I hope the above information given by me will clear the doubts if investors are having.

Thanks and Regards,
Ankit Narang


Comments

Guest Author: JFV21 Nov 2014

This is a fantastic article.



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