Understanding Stock Face Value, Capital Increases, and Bonds
Face value of a stock: The value that appears in the account. This value is set at the time of the stock’s issuance. It’s calculated by dividing the total share capital by the number of shares issued when the company was created.
Capital Increases
To increase share capital, a company issues new shares. These new shares are first offered to current shareholders; this is known as pre-emptive rights. If shareholders don’t exercise this right, the shares can be acquired by others.
If the starting price of new shares equals the face value, the shares are issued at par. If the price is higher than the face value, they are issued above par. The difference between the issue price and par value is called a premium. This price increase reflects the company’s increasing value over time.
The theoretical value of a stock is the result of dividing the net assets of the company by the total number of shares. This concept explains the bonus issue of new shares, which aims to collect the theoretical value, ensuring new owners pay a price that reflects the company’s accounting data.
The real value of a stock is governed by supply and demand, not the company’s accounts. For publicly traded companies, it corresponds to the quoted value. A stock is quoted above par when its market value exceeds the face value; otherwise, it’s listed under par.
The preemptive right protects shareholders against capital increases, allowing them to maintain their stake in the company. They can even sell this right. It represents long-term, external, and own financing.
Issuance of Bonds
Issuing bonds raises funds by contracting a debt. The total capital obtained is called borrowing and is divided into obligations. Bondholders are those who buy the bonds. Subscription is the act of acquiring them. The return on investment is called a refund. The time limit for repayment is called maturity.
Similarities Between Bonds and Stocks
- Both represent a proportion of the whole (bonds represent debt, shares represent equity).
- Both are represented by titles.
- Both have a nominal value reflected in the title.
Differences Between Bonds and Stocks
- Bonds are returned at the deadline; stocks are only returned to members upon the company’s dissolution.
- Bonds involve a fixed interest payment, while stock remuneration depends on the company’s results and the willingness of partners to share benefits.
Incentives for Bondholders
To encourage investors to subscribe to bonds, companies can use various options:
- Discount on bond issue: Offering a price below the nominal value.
- Premium reimbursement: Increasing the value of each bond at repayment, giving priority to the investor.
- Bonds convertible into shares: At the end of the repayment term, the bondholder has the option to obtain the redemption price or exchange the bonds for company stock at a pre-fixed rate.
- Advance interest payment: Providing the total interest payment that each bond will generate at the time of subscription or at the beginning of each year.
- Indexed Bonds: Adjusting the interest rate in line with inflation, protecting investors from potential loss of investment value.
Access to bond financing is generally reserved for large companies. It represents long-term, foreign, and alien financing.