What is face value of a stock? Why it is different from issue price in the IPO?

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#IPO #facevalue #sharepremium
This video explains why companies asks premium price to buy their shares during IPO process. The simple example used in the video can make you understand the purpose of face value, IPO share price and premium. You also learn how to arrive the issue price using the IPO valuation.

Companies raise money for their growth from public when they go for IPO process. But investor who are buying the shares of the company during IPO process must pay premium price, which is greater than face value of the company. This may first look injustice to investors who are willing to buy the shares of the company during IPO process, since the company is charging premium price. But if we look from different perspective, we may understand why company is charging premium price. During the beginning stage of the company, there would be only one or few promoters who would have invested their money in the company. For example, 4 promoters invested Rs 2 each and each got 25% of the company. After 10 years when the company looks promising and making sufficient profit and when the company needs more money for their further growth, they go for IPO process. But now if the company charge the same amount (Rs 2) for the stake of 25% of the company then there would be no difference between public, who are investing now and the promoters who have invested 10 years ago. Moreover, promoters got high percentage stake with lesser money because they invested, when the company was in starting stage where the future prospects was risky. Whereas the public is investing in the company where the future prospects is likely to be less risky when compared to 10 years ago. This video explains in details the pricing concept in IPO process and also explains how the company accounts the share premium in the books of the company.

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