In the securities market, the amount that is written on the face of equity or debt instruments is called its nominal value; also known as the face value or par value.
Implications for Securities
However, the implications are not the same for equity instruments and debt instruments.
Equity instruments represent ownership. Therefore, nominal value represents the maximum liability that the shareholder-owner owes to the company. Thus, if equity shares with face value of Rs.10/- are partly paid up upto Rs.5/- per share, the shareholder is not liable to contribute more than an additional Rs.5/- per share to make up the value of Rs.10/- per share.
Debt instruments represent borrowing and the nominal value here is the amount that the borrower must pay back to the instrument holder on the maturity date.
Change in Value
The face value of an equity share could undergo change in the event of a stock split. Thus, one equity share with a value of Rs.10/- could be split into 10 equity shares each having a value of Rs.1/-.
Return
The market price of a share is determined independently of its par value. But, dividend is distributed in relation to the face value and, therefore, the higher the market price of the share as a multiple of its nominal value, the lower will be the return.
