whats the difference between face value and market value?

Question

if two stocks A and B have same face value , but A = 23 , and B = 230 .whats really it shows ? , stock B is 10 times bigger than stock A or the people who invested in B ,have gained 10 times more than those of stock A.
how this can effect the promoters ,
and how do people become millionairs , in a short while , when they float the stock.

Answer 1

Things that have "face value" or something to that effect, tend not to be common stocks. Bonds, warrants, or such items that are convertible to stocks may have a set redemption or conversion unit value.

Bonds, straight corporate bonds, are redeemed for cash. The standard unit is $1,000 and the "prices" you see in the lists are usually percentages. A bond that sold for 97 actually cost someone 97 percent, or $970 (commissions extra, of course). A bond that sold for 103 actually sold for 103 percent, or $1, 030--which is what we call at a premium. When the bond matures, you only get $1,000, so there was a potential $30 capital gain in the first example and a potential $30 capital loss on the second. The value in such is commonly that either the first example represents some extra risk causing the value to be discounted (the company became unprofitable in the last financial report, for instance), or interest rates rose. With a rise of interest rates, say you could get 5 percent with your money in the bank, but the bond was only going to pay 4 percent (of $1,000). You wouldn't want to pay full price for a bond that gave you less value for your money, now would you? So you offer to buy it at a discount. Similarly, if the bond were selling at a premium, it is usually because you would be getting a really good rate of return, so the seller gets a piece of that by not selling unless he gets more than its obvious value.

What you may also be tempted, but erroneously, to see is the use of par value. When a company is initially capitalized, there is a basic, per share value that is set. It is usually ignored, but could come in handy if you might confuse the stock with another issue--pre-bankruptcy, or a different stock class, for instance. The par value was "face value" only once, at the inception or initial capitalization of the company.

Now here is the important guage you might want to look at. It is called book value or is commonly represented in the P/E or Price to Earnings ratio. If a company has a book value of $23, which is the stockholder equity divided by the number of shares outstanding, but is selling for $230 at market, then that says something different from a company that is selling at market for $23 but has a book value of $1 per share. Still, most folks use the profits or earnings that a company makes to determine how much extra they will pay for a stock. If company A and company B both have a book value of $23, yet company A earned $100 per share in the last reporting period while company B only earned $1 per share in the last reporting period, you would think that company A just might be worth more than company B. Compare the P/E numbers and see if that is so. If company B has a high P/E, then one of two things is happening: (1) if people are expecting far better things in their future, they are buying on that expectation, or (2) people are selling it, but not fast enough to retain their value, so the price has no where to go but down since it is already over valued compared to what they could do with their money elsewhere.

I hope this helps.

Answer 2

Lets start one at a time. Say the face value is 10, then the market value of 23 & 230 imply that the vale of share/stock has increased from 10 to 23 & 230 respectively, i.e. the company has assets backing of 2.3 and 23 times respectively.

Now wehen promoters sell these stocks they gain according to the market value.

Answer 3

Stocks have what's called a book value that is totally irrelevant to investing. A company has to decide on a book value when they have an IPO. It could be 10 dollars or 10,000 per share. Google had an IPO a few years back at over 100 dollars per share but that just means you can't buy that many shares. It doesn't show how valuable the stock actually is. If you buy a stock at 20/share and it's a good stock you can buy 5 times as much. Plus stocks split all the time to make them more affordable to regular investors.

Answer 4

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