The concepts of face value and market value influence stock and bond investors' trading behavior, causing them to favor investments that at first glance may seem to yield less than alternatives. The terms "face value" and "market value" also apply to loans and accounts receivable when they're being sold from a lender/creditor to an investor.
Face value, simply put, is the stated value of an investment. For stocks, face value is the par value, or original price, of the stock. For bonds and other debts, face value is the principal amount of the debt. Market value, on the other hand, is the price at which buyers and sellers reach agreement in secondary markets such as stock exchanges and debt-purchase agreements. The market value of an investment can deviate considerably from its face value. Investments with market values higher than their face values have appreciated in value enough to have earned a profit over their original value, and the opposite holds true as well.
A range of forces act upon investments to change their market values. Financial data and news releases can alter the market value of stocks. Market interest rates and the federal funds target rate can influence the market value of bonds. Industry, political and legal developments can influence the value of securities as well, as can the emotional responses of traders in the marketplace. For debt sales, an active default, the age of debts or tarnished credit ratings of borrowers can lower the market value of the investment.
Compare stocks' current market value to their face value to get a picture of how the stock has performed over time. Stock issued at $5 per share that is currently priced at $105 per share, for example, has experienced significant value growth, especially if the stock is relatively new on the market. If the $5 par value stock were at $7 per share five years after the IPO, on the other hand, the stock would have performed poorly over time.
Bond traders pay more attention to the difference between face values and market prices than stock traders. Since bonds are issued at different interest rates at different times, the market value of a bond purchased today will change in the future based on the prevailing interest rates on new bonds at the time. If prevailing rates are lower than the older bond, the market value of the older bond will be higher than its face value, and the bondholder can sell the bond to another investor at a premium.
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- How the Stock Market Works
- What Are the Main Differences Between the Market Value & Book Value of a Stock?
- How to Start in the Stock Market
- Difference Between the Stock Market & the Bond Market
- How to Trade Stock Market Options