Judging a book by it's cover? No no no...

In the world of stock markets, there are two things that you will find in plenty. One is the money. The second is the list of technical terms used. Most of the terms tend to confuse the common man (i.e. people like me & Niranj). Let’s try to unravel the mysteries, one at a time..

One of the predominant jargons we come across is the difference between a "face value" and a "premium" of a share. Take a 100 Rupee note for instance. We tell that the value of the note is 100 because of the number printed on it. This is called Face Value - i.e. the actual value of the item in consideration. The same 100 rupee note after several years becomes very valuable in the hands of an antique collector and sells for Lakhs /millions. The difference between the actual value ( 100/-) and the actual price is called the premium.

Bringing this analogy to shares, the actual value of the share is called the face value (FV). That is, the actual contribution made by the person towards the company is equal to the face value. The face value of a share is generally Rs 10/-. There are also shares that have a face value of Rs2/- and face value of 100/-. Further, all the profits that are allotted to a shareholder are also based on this value. For ex, a 200% dividend on a share (with FV Rs 10) implies a dividend of Rs 20/ share.

When a company plans to do an IPO, ie Initial Public offering (another jargon ;) ), it determines the Face value and the Premium at which it plans to sell the shares. The premium and the face value of the shares are usually different. This is due to two reasons.

1) The company needs to generate a said sum of money within a given number of shares.
2) The company believes that its shares are worth the specified premium and people will buy the shares at the specified price.

Note that though the shares are “actually” worth only the face value, they are usually bought and sold at a much higher value – courtesy, the premium. This is because of the valuation of the company. In simple words, the market and the investors believe that the company will continue to run well and achieve results. More the belief more is the demand for the company's shares, and thus a higher premium. Further, the difference between the FV and premium will be treated as capital, meaning that it cannot be returned to the shareholders by way of a dividend.

You might have noticed the use of another “technical” term – IPO . The IPO is the process by which the company enters the stock market, and sells its shares to the public. This is also referred to as ‘going public’. While raising money is one of the primary reasons for a company to list its IPO, there are other advantages also. These advantages along with the process of IPO form the content of the next blog. Keep looking.... :)