Off Late, I have been getting, most of the queries from the readers, on clarifying the Basic Differences & Aspects of Face Value (FV), Book Value (BV), Stock Splits & Bonus Shares issued & how do these affect our Investments, as an Individual.
Through this Post, I am trying to throw some light on these basic Concepts.
All About Stocks
What is a Face value of a Share?
Face Value (Par Value) of Share
All Companies issue shares, with a fixed denomination called the Face Value (or Par Value) of the share. This Face Value be indicated on the share certificate. Generally Indian shares has a Face Value of Rs. 10/-
Difference between Face Value and Market value
A Face Value has no relation, with the Market Value of the share. Market value of the share, will always change, depending upon the market conditions. But the Face Value, is a fixed value of the share, as per the books of the company.
Difference between Book Value & Market Value
Book Value is the price paid for a particular asset. This price never changes, so long as you own the asset. On the other hand, Market Value is the current price, at which you can sell an asset.
For example, if you bought a house 10 years ago for Rs 30,00,000, its Book Value, for your entire period of ownership, will remain Rs 3,00,000. If you can sell the house today, for Rs 50,00,000, this would be the Market Value.
Book values are useful, to help track profits and losses. If you have owned an investment, for a long period of time, the difference between Book and Market Values indicates the Profit (or Loss) incurred.
Market Value: The Market Value of a stock, represents the price, investors will pay to buy or sell the stock. Market value does not always represent the actual value of the company.
The terms “Overvalued” and “Undervalued” compare the Market Value of a Company’s Stock, to the Company’s Actual value, or Book value.
When a company’s stock, sells for more, than the company’s book value per share, analysts consider the stock Overvalued. Analysts consider stock that sells for less, than the company’s book value per share Undervalued.
For example, a Company’s Stock might trade at Rs 1000 per share, but the Company has a Book Value per share of Rs 900. Analysts would consider this stock Overvalued, because the Market pays more, per share, than the Company is worth.
Book Value: If a company went belly-up (i.e. it goes bankrupt) and sold all of its Assets and subtracted any Liabilities, the remaining value, which investors would receive, represents the Company’s Book Value.
In other words, Book Value, represents the total value of all the assets minus any liabilities. This value often gets referred to as Shareholders’ Equity or Owners’ Equity.
Real World
Because the Market value of a Stock, is driven by Supply and Demand, many Companies trade well above, or often below their Book value.
A Face Value or Par Value of the Company’s share, always remains the same, irrespective of the Market Price, of that share. Companies have to right to Split the Face Value of the share to Rs. 5, 2 or 1, to bring more Liquidity to the share.
Liquidity means, that more number of People, can now buy & sell the Share, as Price is in their reach, before the Split, when it was quoting higher, in Quantitave terms (Rs 4000 Seems to be more per share, as compared to Rs 400 or 40).
What are Bonus Shares?
Bonus Shares are additional free shares, issued to the shareholder by the company. Profitable Companies in India issue Bonus Shares. These are additional shares issues, given to the Shareholder, without any cost to existing shareholders.
What does the Ratio of Bonus Shares mean?
Bonus shares in India are issued in a definite proportion to the existing holding. (Eg. Ratios against the number of shares holding by the shareholder)
Example 2 : 1 bonus would mean, that you will get 2 additional shares (free), for every 1 share, you hold in the company. If you hold 50 shares of a company, a Bonus share of 2:1, will get 100 Bonus shares FREE. So your total number of shares in that company will be 150 instead of 50, without any additional cost (Is that exciting!!)
How Bonus Shares are Issued?
Bonus shares are issued by using on the free reserves of a company. Companies accumulate its reserves, by retaining part of its profit, over the years (the part that is not paid out as dividend). Sooner these free reserves increase. When the company issues Bonus shares, the reserves will convert into the Capital.
Finally you are also not paying for this and the Company profits are not affected.
Does it impact Stock Price?
Bonus Shares issue, adds to the total number of shares, in the market. If a company had 10 lakh shares. Now, with a bonus issue of 2:1, there will be 20 lakh shares issues. Now, there will be 30 lakh shares.
The Earnings of the Company, will have to be divided, by that new number of Shares.
Earnings Per Share (EPS) = Net Profit/ Number of Shares
As the profits remain the same, and the number of Shares increases, the value of Earnings Per Share (EPS) will go down.
In fact, the Stock Price, should also go down proportionately, to the number of new shares. But sometimes, in reality, the share prices may not go down, which gives more advantage to the share holder.
How to Grow your Money?
Makes it Easy to Buy and Sell
Whenever Bonus shares are issued, the stock becomes more liquid. And this make it easier to buy and sell.
Are Bonus Shares Good or Bad for me?
A bonus issue indicates that the company is booming and it is in a position to service its larger equity. Bonus share issue is considered as a Positive Sign for the Company.
Whenever a bonus issue is announced, the Company also announces, a Record date for the issue.
Record date is the date, on which the bonus shares takes effect, and shareholders are entitled to the bonus shares on that date.
Hope it helps. Please do share your feedback.
Bharat Sahni
PlanUrMoney 