What is the Nominal Value of Shares?
By Joanne Hue, published: 2023-08-10
Are you curious about the nominal value of shares and how they might differ from a share’s market value?
The nominal value of shares, also known as the par value or face value, is a value that is assigned to individual shares when the company is founded.
It is the minimum price at which shares can be sold during the initial issuance, and it often serves an accounting purpose.
Here’s everything you need to know:
What are company shares?
Shares, in the context of finance and business, represent units of ownership interest in a company or financial asset.
Owning shares in a company means owning a portion of that company. The terms shares and stocks are often used interchangeably.
Shareholders are the individuals who hold shares in the shareholding company. The number of shares held by an individual reflects the control or ownership of that member over the company.
How many shares can be issued by a company?
There is no upper limit of shares which the company may issue.
The minimum number of shares a company can issue is one, which is normal when an individual sets up a limited company.
To better understand it, here are a few examples of issuing shares by the company.
- One issued share = 100% company ownership
- Two of equal value = 50% ownership per share
- 10 of equal value = 10% ownership per share
- 100 of equal value = 1% ownership per share
Therefore, where a business has a net worth of £100 million and there are 50 million shares, each share is worth £2.
The company issues the shares to raise capital, and investors purchase company shares in the belief that the company will be a profitable success and they will be able to have their share of its success.
What are ordinary and preferential shares?
Ordinary shares and preferential shares are terminologies used to describe different types of stock in a company. Each share type represents a different ownership level, rights, and benefits.
Ordinary shares (common shares or common stock):
- Ownership and Voting Rights: Holders of ordinary shares have ownership in the company and typically have the right to vote at shareholder meetings, which allows them to influence decisions like the election of directors or approval of mergers.
- Dividends: Dividends for ordinary shareholders are not guaranteed and may vary depending on the company’s profitability. If dividends are declared, they are typically paid out to ordinary shareholders after any dividends for preferred shareholders.
- Residual Claim: In the event of a company’s liquidation, ordinary shareholders have a residual claim on the company’s assets. This means they are paid after preferred shareholders and debt holders. Given this, there’s a potential for higher returns but also higher risk.
- Capital Appreciation: The value of ordinary shares can increase (or decrease) based on the company’s performance, providing potential capital gains for shareholders.
Preferential shares (preferred shares or preferred stock):
- Priority on Dividends: Preferred shareholders have a higher priority regarding dividends. They receive dividends before ordinary shareholders. Often, these dividends are at a fixed rate, providing predictable income.
- Priority on Assets: In the case of company liquidation, preferred shareholders are ahead of ordinary shareholders when it comes to claims on company assets. However, they come after debt holders.
- Limited or No Voting Rights: Unlike ordinary shareholders, preferred shareholders typically do not have voting rights or have limited voting rights.
- Convertibility: Some preferred shares can be converted into a specified number of ordinary shares. This feature can attract investors who want to capitalise on potential capital appreciation.
- Cumulative Dividends: If the company doesn’t pay a dividend in one period, some preferred shares have a “cumulative” feature, meaning that the unpaid dividends will accumulate and have to be paid out before any dividends can be paid to ordinary shareholders in the future.
It’s important to note that the exact rights and privileges of ordinary and preferential shares can vary depending on the company’s bylaws and the terms under which the shares were issued.
Investors should carefully review the specifics before purchasing shares.
The market and nominal value of shares
Shares have both nominal as well as market value. The difference between each is known as a premium.
The terms market value and nominal value are used in the context of shares or stocks and refer to different values assigned to a share. Here’s a breakdown of the differences:
Nominal value (par value or face value) of a share:
- Definition: The value at which the share is originally issued or the value stated on the face of the share certificate. It’s essentially the “stated” value of a share when the company is incorporated.
- Purpose: Nominal value is used to determine the company’s legal capital. Companies cannot usually issue shares for less than the nominal value.
- Change: The nominal value remains constant unless there’s a corporate action like a stock split.
- Usage: It doesn’t have much relevance in terms of the market performance of a stock. Its primary significance is more for accounting and legal purposes.
- Example: If a share has a nominal value of £10, it doesn’t mean the market believes it’s worth £10. It’s just a bookkeeping value.
Market Value of a Share:
- Definition: Market value is the current price at which a share trades in the stock market. It’s determined by the perceived value by investors based on the company’s performance, growth prospects, and other market factors.
- Purpose: Reflects the current valuation of the company in the stock market. It changes continuously during trading hours as shares are bought and sold.
- Change: The market value fluctuates based on supply and demand dynamics, news, company performance, broader economic factors, and investor sentiment.
- Usage: It’s a critical metric for investors. It provides insights into what the market believes a company is worth at any given time.
- Example: If a company’s share has a market value of £150, an investor needs to pay £150 to purchase one share of that company in the open market (ignoring transaction fees).
In summary, while the nominal value is a fixed and arbitrary value assigned to a share for accounting purposes, the market value is dynamic. It represents the current valuation of the share in the open market.
How to calculate the nominal value of shares
To determine the nominal value of shares for a company, you would typically use the following information:
- Authorised Share Capital: The total value of shares a company can issue. It’s set by the company’s founders or directors when they incorporate the company and can be changed later by a vote of the shareholders.
- Number of Authorised Shares: The total number of shares a company can issue.
Given this information, you can calculate the nominal value of each share as follows:
Nominal Value (Par Value) of a Share= Authorised Share Capital/Number of Authorised Shares
For example, if a company has an authorised share capital of £500,000 and is authorised to issue 100,000 shares.
Nominal Value of a Share: £500,000/100,000=£5
However, it’s worth noting that the nominal value doesn’t indicate the market value or actual worth of the shares. It’s mostly an accounting figure.
To know how much a share is worth on the open market, you should look at its market value or trading price.