Face Value and Bonds
The face value is of greater importance to bond investors. Simply put, the face value represents the nominal value of the share or bond. It is the value you would see on a paper stock or bond certificate. Learn what face value is, when it matters, and how to consider it best in your investment efforts. We will also refer to the face value as “nominal value.” Consider these two terms interchangeable, as the term face value appears more frequently in relation to bonds.
What is Face Value?
Face value or nominal value is a “fixed value” assigned when a company issues a stock or bond in the market. Unlike market value, the face value or nominal value does not change. You will find the face value printed on the stock or bond certificate.
The face value of preferred stocks determines the amount of dividends distributed. However, the face value of common stocks is not particularly significant to investors as they cannot buy or sell shares at face value. Instead, investors in common stocks pay the market price, which is determined by supply and demand.
Most bonds have a face value of $100 or $1,000. For bonds, interest rates and credit ratings determine market value, which can be higher or lower than the face value.
Face Value and Stocks
The face value of preferred stocks is important when evaluating the profitability of owning preferred stocks, as it helps determine the amount of dividend distribution. For example, if a company issues preferred shares with a face value of $100 and a dividend rate of 2%, they will pay $2 annually as dividends. In this way, preferred stocks act like bonds.
For common stocks, the face value is not very important to ordinary investors. It is a regulatory requirement in some states where common stocks cannot be issued at less than face value. Typically, it has no relation to the market price of the stock, which is determined by supply and demand.
Key Takeaways
The face value, also known as nominal value, represents a nominal value for a share or bond determined by the company at issuance. Face value is more relevant to bond investors and preferred stock investors than to common stock investors. For common stocks, face value does not affect market value at all; that depends on supply and demand dynamics. Bonds can trade above or below face value, leading to selling at a premium or discount. The face value of preferred stocks determines the amount of dividends that the holder of those stocks receives.
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Sources:
– U.S. Securities and Exchange Commission. “Amazon.com, Inc. Quarterly Report.”
Source: https://www.thebalancemoney.com/what-is-face-value-5097136
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