What are the terminologies used in Equity market?
What is face value?
The nominal price of a share is called as its face value. The equity capital of the company is calculated by multiplying the number of shares issued by its face value. For instance, if a company has issued 2 Lakh shares with Face Value Rs. 10, then the equity capital of the company would be Rs. 20 Lakh (2 Lakh * 10). Shares may be issued to the investors at the face value, or a price higher (premium) than the face value, or a price lower (discount) than the face value.
The face value of a company’s share does not generally change except the company chooses to split or merge its shares.
In such instances, the face value of company’s shares would decrease (in case of split) or increase (in case of merger). For instance, if an investor holds 1 share of Rs. 10 FV and the company decides to split its one share into five, then the new face value of its shares would be Rs. 2 and the investor would hold 5 such shares.
The face value of share is significant for calculating the dividend payable on a share.
When dividends are revealed as a percentage, that percentage is considered with regard to the face value
For instance, if a company with Face value of Rs. 10 declares 30% dividend, it means dividend of Rs. 3 per share. On the other hand, if a company with Face value of Rs. 2 declares 30 percent dividend, which means the dividend of Rs. 0.60 per share.
What is Book Value?
Book Value of a company is the net-worth of the company. To calculate book value per share, net-worth of the company is divided by the number of outstanding shares. Book value per share means the hypothetical amount of money each share would get if the company was to wind up.
On left hand side of a balance sheet, there are chiefly two things – share capital and debt.
The assets of the company are scheduled in the balance sheet at its book value, i.e. cost less depreciation.
The realizable value of these assets may be different from book value and is never known with certainty.
If it is supposed that each asset on the balance sheet may be converted into cash at its book value, then after fully honouring the business liabilities, cash equivalent to net-worth (equity plus reserves) would be left for shareholders.
The ability of the company to meet its liabilities would depend upon the realizable value of its assets.
What is Market Value?
This is the market price of a share. The market value of the entire equity of a company is known as market capitalization and is computed as market price per share multiplied by total number of outstanding shares.
The market value of a share depends upon host of aspect like the expected performance of the company, market sentiments and liquidity, among others.
What is Replacement Value?
This refers to the market value of all the assets of a company at any point of time. If a new company were to set up with all the infrastructure/plants, which an previously existing company has, then the cost which it would have to bear today is called as the ‘Replacement Value’ of the existing firm.
What is Intrinsic Value?
Intrinsic Value of an asset is the present value of likely free cash flows from the asset. “It is the reduced value of the cash that can be taken out of a business during its rest of life.”
The intrinsic value of an equity share is the discounted value of its future remuneration to the investors.
Investing in equity is about calculating roughly this essential value and paying a price today to earn the future value.