There are many types of value related to shares which includes Current value at which it’s currently traded on exchange and nominal value of shares etc. To understand the concept of share, investors must know all of them. However, In this article let’s understand the What is Nominal Value & Nominal Value of Shares with an example.
Table of Contents
What is Nominal Value?
The redemption price of a security is its nominal value, also known as face or par value, and is usually written on the front of the asset. It is the declared value of an issued instrument, as contrasted to its current value, in the case of bonds and shares.
While, in economics, nominal values indicate the present rate or price that has not been adjusted for inflation or other reasons, as contrasted to real values, which have been adjusted for overall price range fluctuations across periods.
Importance of Nominal Value
Many bond and preferred stock estimates, such as interest payments, market prices, discounts, premiums, and yields, depend on nominal value.
Owing to supply and demand factors, the nominal value of ordinary shares is normally significantly less than its market value, but the nominal value of preferred stock should be closer to its market value.
Depending on market interest rates, a bond’s nominal value will differ from its market price.
Nominal Value of Shares
When a firm issues share capital, the nominal value of its share, or face value, is an arbitrary amount allocated for balance sheet purposes – and is often INR 10 or less. It has very little impact on the share’s current price.
Example
If a firm receives approval to raise INR 10 million and its stock has a INR 1 Face value. So it can issue and sell up to 10 million shares of stock. The share premium is the gap among the nominal and the sale price of equity.
It can be significant, although it is not officially included in share capital or restricted by permitted capital limits. If a stock sells for INR 30, INR 10 million is documented as paid share capital, but INR 290 million is classified as additional paid in capital.
Preferred shares
Preferred shares are a type of hybrid security that pays dividends and can be exchanged to common stock at any time. The nominal value is essential because it is the amount that is considered to determine the dividend.
Example
A company that issues a 7% preferred share with a nominal value of INR 70 would pay INR 4.90 (7 percent * 70) per share in annual dividends. The value of the preferred shares will be determined by the market’s estimate of the dividend percentage being offered, which in this example is 7%.
If the market is content with 7%, the share will trade at or near its nominal value. While the preferred share price will trade at a greater or lesser value than its nominal value if the dividend percent is greater or lesser than market estimates.
Formula Nominal Value of Shares
The method for calculating nominal share value is simple: divide the paid-up share capital by the quantity of outstanding shares of the firm.
Paid-up Share Capital / Quantity of Outstanding Stocks = Nominal Value of Shares
Steps to Calculate the Nominal Value of Shares
The formula can be found by completing these steps:
- Identify the total paid-up share capital, which is clearly visible on the balance sheet as a line item.
- Next, figure out how many stocks of the firm are currently outstanding. Please remember that the paid-up shares, not the authorised shares, must be used.
- Ultimately, the formula is produced by dividing the total paid-up share capital by the quantity of outstanding stocks of the firm.
Example of the formula
To determine the share nominal value, let’s use the example of a corporation called Xyz Ltd. Last year, Xyz Ltd began operations as an ice cream production firm.
While Its paid-up share capital was INR 700,000, with maintained earnings of INR 1,200,000, according to its balance sheet for the year ended March 31, 2021.
In the market, the firm has 25,000 authorized stocks and 20,000 outstanding stocks. So Consider the following based on the facts. As a result, Nominal Value of Shares is = 700,000 / 20,000 = 35.
Conclusion
Majorly Nominal value of Stocks is used for dividend & stock split by a company. However, it is also used during liquidation of the company which does not usually happen with large cap companies.
This is all from our regarding Nominal Value of Shares. Although, if you have any doubts about what is a nominal value? you can just comment below.
Other Interesting blogs related to Nominal Value of Shares:
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Nominal value of shares Companies Act
The nominal (or 'par') value of a company's stocks reflects its minimum value. A corporation may not offer stocks at a discount according to Section 580 of the Companies Act 2006. As a result, the nominal value is the lowest amount that members must pay to buy a firm's stock.
Nominal value of shares in India
Nominal value of shares in India is the lowest value of the specific type of shares offered by the firm is determined by dividing the worth of the firm 's total paid-up share capital by the overall number of shares outstanding at the time.
Nominal value of shares vs face value?
Nominal value of shares vs face value is not a right question as both of them are the same thing.
Nominal value of shares vs market value
The redemption cost of a share is its nominal value, which is usually written on the front of the unit. The Market Value of the company is the current price of stock at which it is trading on the stock exchange.
Difference between face value and nominal value of shares
There is no difference between face value and nominal value of shares. Both of them are the same thing.
