Nominal values
When a business is first established, a decision is made about how much equity finance
(the law requires that there is some) it wishes to raise and into how many shares this
is to be divided. If, for example, the decision is that £1 million needs to be raised, this
could be in the form of two shares of nominal value (or par value) £500,000 each, 1 million shares of £1 each, 200,000 shares of £5 each, or (more likely) 2 million shares of
£0.50 each. Which of these, or of any one of the almost infinite number of other possibilities, is decided upon, is a matter of the judgement of the promoters of the business.
In making this decision, probably the major factor is marketability. Most investors
would not find shares of very large nominal value very attractive, as this would make
it difficult to invest an exact amount of money in the business. If the shares were of
nominal value £50, an investor who wished to invest £275 could not do so. The choice
would be between five or six shares. If the shares were of £10 nominal value the
investor could get fairly close to the target of £275 (27 or 28 shares). It seems to be
believed that large nominal value shares are not as readily marketable as those of
smaller denomination. Certainly large-denomination shares are very rare in practice.
Few ordinary shares have nominal values larger than £1 each, with most being smaller
than this.
Once the business has invested its capital and has started to trade, the market value
of its ordinary shares will probably move away from the nominal value, as a result of
market forces. Further issues of ordinary shares will normally be priced by reference
to current market prices: that is, businesses will seek to issue further ordinary shares
at the highest price that the market will bear. In fact, nominal values cease to have
much significance once the business has started trading. This is evidenced by the fact
that, in the USA, which has similar corporate financing arrangements to those of the
UK, shares of no par (or nominal) value are not unusual.
The decision on nominal value is not irrevocable; businesses may subsequently split
or consolidate nominal values. For example, a business whose ordinary shares have
a nominal value of £1 each may split them into shares of £0.50 each. In practice this
is easily accomplished, and culminates in each ordinary shareholder being sent a
replacement share certificate showing twice as many £0.50 shares as the previous
number of £1 ones. As we have seen, the objective of such a move seems to be to
reduce the unit price to make the shares more marketable.*