Definition of Nominal Value of Shares
The nominal value of a share is such value of the share that the company is assigning to the unit of share at the time of its issue, and it is also known as the par value or face value of the share and can be calculated by dividing the paid-up share capital of the company from the number of shares outstanding till date.
Explanation
It refers to the value assigned to each share of the company when the company issues such a share and is considered to be the minimum value at which the shares are to be issued.In other words, the nominal value is the minimum contribution that an investor is required to make when they are willing to purchase the shares of any company. This value assigned to the share is static, unlike the market value that keeps on fluctuating. The nominal value of the share remains the same over the period of time but gets changed at the time of the stock split.
The formula for the Nominal value of shares:
Where,
Paid-up share capital refers to the money that has been paid to the company in exchange for its shares.
The total number of shares outstanding is the number of shares issued to the company’s shareholders till the given date.
Example of Nominal Value of Shares
Suppose a company Hello Inc. is engaged in a business related to information technology. The balance sheet of the company shows the following data as of 31.03.2020.
|
Particulars |
Amount |
| Authorized share capital | $1,000,000 |
| Issued & paid-up share capital | $800,000 |
| Retained earnings | $250,000 |
| Total number of authorized shares | 100,000 |
| Total number of outstanding shares | 80,000 |
From the above data, calculate the nominal value of shares.
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Solution:
It is calculated as:
Nominal Value of Shares = Paid-up Share Capital / Total Number of Shares Outstanding
- Nominal Value of Shares = $800,000 / 80,000
- Nominal Value of Shares = $10
Nominal Value of Shares vs Market Value
- The nominal value of a share is the share value that is assigned to it at the time of issuance of such share where the value does not take into consideration the market factors, whereas the market value is the current market price of the company’s share at which the security is traded in the market and is usually greater than the nominal value.
- The nominal value of a share is static, i.e. it does not change with time, but the market value keeps on regularly changing due to the various market factors such as inflation, government policies etc.
Benefits
Benefits are discussed below-
- The face value of shares plays an important role while issuing a company’s share as it is a critical component of making calculations & decisions related to preferred stocks such as discounts, market values, premiums, interest payments, etc.
- The nominal value of a share is the basis on which the calculation of the amount of dividend that is to be distributed is done.
- The nominal value is not affected by the change in market prices; therefore, it remains static, and also the share capital issued is recorded at the nominal value in the balance sheet of the company, which reduces the efforts of the company to change the value of share capital in the books regularly (if recorded at market value) as the market value is changed regularly.
- Nominal value creates a legal binding on the investors by creating a fixed minimum contribution that the investor is required to make while purchasing the company’s share.
Limitations
Different limitations are discussed below:
- It does not consider the effect of changes in the value of shares in market position, but considering the market position is important to analyze the company’s market standing. Therefore, It does not reflect or give an idea about the current picture of the company.
- Nominal value also fails to reflect the amount that the investor/shareholder may actually realize by selling such share or at the time of the company’s liquidation.
- A balance sheet of the company fails to show the true and accurate position of the company to the users as the shares are recorded at nominal value, and nominal value does not take into account the variation in the prices that occurs due to changes in market forces.
Important of Nominal Value of Shares
Some of the important points are discussed below:
- The nominal value of the share, also called face value or par value is the arbitrary value assigned to a unit of share used to measure the dollar accounting value of the company’s shares to prepare the balance sheet.
- It is a minimum value at which the share is required to be issued to the investors and is mostly less than the company’s market value.
- The nominal value is fixed and does not change regularly with the variation in the profits and gains of the business and other external forces.
Conclusion
Thus, the nominal value of shares the value assigned to the company’s share before issuing the share and is the minimum value at which the shares are allotted to an investor. The company’s share capital is reported in the balance sheet at its nominal value and not at the market value. The nominal value is static in nature and therefore remains the same over time but may change when the company is willing to do a stock split.
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This is a guide to the Nominal Value of Shares. Here we also discuss the definition and difference between the nominal value of shares and market value, along with benefits and limitations. You may also have a look at the following articles to learn more –
