Nominal value of shares

3 key takeaways

• Nominal value is the minimum price at which a company’s shares can be issued, usually set at a very low value.
• It does not reflect the market value of the shares, which can be significantly higher.
• The concept of nominal value is primarily used for accounting and legal purposes.

What is the nominal value of shares?

The nominal value, or par value, of shares is the stated value assigned to each share by the issuing company at the time of its creation. This value is often very low, such as $0.01 or $1 per share, and is used as a baseline measure for the minimum price at which shares can be issued. The nominal value is established in the company’s founding documents, such as the articles of association.

It’s important to note that the nominal value is not indicative of the market value of the shares. The market value, or the price at which shares are bought and sold on the stock exchange, is influenced by the company’s performance, investor demand, and overall market conditions.

Purpose of nominal value

The nominal value serves several key purposes in corporate finance:

• Accounting: It helps in the calculation of the share capital reported on the company’s balance sheet. The total share capital is the nominal value multiplied by the number of issued shares.
• Legal: It establishes the minimum price at which shares can be issued, protecting the company from issuing shares at an undervalue.
• Investor protection: It provides a base value for shares, ensuring that new shares are not issued at prices that could unduly dilute the value of existing shares.

These purposes highlight the nominal value’s role in maintaining corporate financial integrity and protecting shareholder interests.

Differences between nominal value and market value

Understanding the distinction between nominal value and market value is crucial for investors:

• Nominal value: This is the face value set by the company, used for legal and accounting purposes. It remains constant unless altered through corporate actions like stock splits.
• Market value: This is the current price at which shares trade on the stock market, determined by supply and demand, company performance, and broader market conditions. It fluctuates over time and can be significantly higher or lower than the nominal value.

Investors should focus on the market value when assessing the potential return on their investment, while the nominal value is more relevant for understanding the company’s capital structure.

Impact on shareholders

The nominal value of shares can affect shareholders in several ways:

• Issuance of new shares: If a company issues new shares at or above the nominal value, it ensures that the company raises sufficient capital without undervaluing existing shares.
• Dividends and capital distribution: In the event of liquidation or capital distribution, the nominal value can serve as a reference point for calculating returns to shareholders.
• Corporate actions: Actions such as stock splits or consolidations can alter the nominal value, impacting the accounting treatment of shares but not necessarily their market value.

Understanding the implications of nominal value helps shareholders better navigate corporate actions and financial reports.

The nominal value of shares is a fundamental concept in corporate finance, serving as a baseline for share issuance and a tool for accounting and legal purposes. While it does not affect the market value directly, it plays a crucial role in maintaining the company’s capital structure and protecting shareholder interests.