Deciphering the Nominal Value: The Guide Every Investor Needs

Many novice investors make the same mistake: confusing the face value of a stock with its market price. It’s like comparing the production cost of a product with what it finally sells for in the store. This confusion can lead to costly decisions. That’s why today we will delve into this concept that seems simple but hides important complexities.

What is the actual face value?

Let’s imagine a company decides to distribute its wealth among its shareholders. The face value is precisely that: the result of dividing the company’s initial equity by the number of shares issued. It’s not complicated, but it’s essential to understand it well.

When a company decides to go public or issues new shares, it sets a face value as a reference point. This value is recorded in the bylaws and represents the theoretical part corresponding to each share of the company’s original capital.

The formula: The most important thing you need to know

How to calculate the face value of a share is surprisingly straightforward:

Face Value = Share Capital ÷ Total Number of Shares

Let’s look at a practical example. If a company has a share capital of 4 million euros and decides to issue 50,000 shares, each share would have a face value of 800 euros. Simple, right?

This calculation remains fixed in the company’s legal documents, although in reality, the market price rises or falls constantly.

Don’t confuse: Face value vs. Market value

This is where many get lost. The face value remains static as a legal reference. The market value, on the other hand, is dynamic and fluctuates according to supply and demand.

Take Caixabank as a real example. The entity has a share capital of approximately 8,060 million euros distributed across an equal number of shares, which equals a face value of 1 euro per share. That face value does not change.

But when that share is traded on the stock exchange, its price depends on how the market values future profits, financial situation, growth prospects, and other variables. If Caixabank’s stock price is 3.29 euros, its market capitalization would be approximately 26.5 billion euros, much higher than its 8.06 billion euro share capital.

This gap between face value and market price is what differentiates a profitable and promising company from one in trouble.

Share capital vs. Market capitalization: Two different concepts

Share capital is calculated by multiplying the face value by the number of shares. It is a fixed figure recorded in the Commercial Registry.

Market capitalization, on the other hand, is obtained by multiplying the total number of shares by their current market price. This figure changes constantly during trading sessions.

A company can have modest share capital but colossal market capitalization if investors believe in its potential. This explains why tech startups reach astronomical valuations.

What happens when the face value changes?

It is not permanent. Companies can modify the face value of their shares through operations such as capital reductions or splits.

A classic case is Unicaja, which went from having shares with a face value of 1 euro to 0.25 euros after a capital reduction. This operation is generally carried out to adjust the capital structure, compensate for losses, or redirect funds to reserves.

The price always tells a story

When you trade shares, the face value is there in the background, but what you really see on the screen is the market price. It is that number that determines how much you pay or receive.

Traditional investors seek precisely this difference. They buy when they consider the price is below the company’s intrinsic value, hoping that over time the market will recognize it and the price will rise. This is what some call finding “undervalued gems.”

Speculators and traders take the opposite approach: they identify overvalued assets and bet that the price will correct downward.

The role of face value in IPOs

When a company decides to go public (IPO), the face value plays a crucial role. It sets the starting point for the share structure. Over time, as the company executes its business plan, the market revalues or devalues that initial position.

Understanding how to calculate the face value of a share allows you to correctly interpret issuance documents and understand the ownership structure of any listed company.

Final reflection

Differentiating between face value, market value, and price is not just an academic exercise. It is the foundation for making informed decisions as an investor. The face value tells you where the company started; the market price tells you where the market believes it should be today; and your analysis must discern whether the market is right or making a mistake.

When you truly understand these concepts, you will be better prepared to operate more confidently and reduce risks.

Related readings that might interest you:

• Dividends: how to calculate them and key dates to consider
• Differences between shares and participations
• What is a gap in the stock market and its importance in trading