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Stocks can seem intimidating for beginners. What if you could invest in your favorite companies without shelling out hundreds or even thousands of dollars per share? Half stocks allow investors to purchase part of a share at a lower price point.
This article will cover the concept in plain terms so you can determine if half stock should have any place in your portfolio.
The meaning of face value
Also known as par value, face value represents the baseline original price assigned per stock share by the issuing firm itself reasonably.
This serves as a reference yardstick for subsequent valuation discoveries, although eventual market worth remains governed by dynamic demand-supply floats instead of theoretical ones.
For stocks, face value denotes the initial share denomination at inception. For bonds, it indicates the redemption amount on maturity. Though seldom equaling prevailing market values exactly, face values assist dividend and interest amount calculations conveniently.
What are half stocks?
Half-stock refers to stocks or bonds that are issued at half the nominal value. However, it means that investors who purchase half-stock pay 50% of what they would typically pay for a full stock or bond. It can be an attractive option for those looking to invest a smaller amount of money or for companies that want to raise funds without issuing too many shares.
To understand this better, let’s examine a few examples:
- If company ABC typically issues common equity stock having a typical ₹100 face value per share. The half-stock version for the company would thus have a ₹50 face value instead.
- Similarly, if Company XYZ normally issues bonds carrying ₹50,000 face value a piece, their bond alternative would sport corresponding face values of only ₹25,000 per bond.
When investors purchase half stocks and half bonds, they can obtain the security for only 50% of their regular face value set by the issuer. It’s important to note that the face value of the security is halved, but the actual market price, which is influenced by supply and demand, can fluctuate independently.
Why do companies issue half stock?
There are a few reasons why a company may decide to issue half stock rather than full face-value stock or bonds:
1. Improve affordability
Reducing the face value of securities by 50% makes them more affordable for retail investors with limited capital. This can expand the pool of potential investors and create a spike in demand for the corresponding stocks or bonds. Overall, reducing the face value can be a useful approach to make securities more accessible to a broader audience and generate interest in the market.
2. Meet funding needs
When a company offers half stock, it means that it is offering a portion of its ownership or debt to a larger group of investors. This strategy allows the company to raise more funds by issuing additional shares or bonds distributed among more stakeholders. By sharing the financial burden with more investors, the company can reduce its overall risk while still achieving its target amount of financing.
3. Attract investors for special classes
Certain companies offer unique types of stocks, such as preferred shares, that are issued at a discounted half-face value price. This can make these types of stocks more attractive and cost-effective for investors due to their lower price points. Preferred shares have a higher priority for receiving dividend payments and, in some cases, may have additional voting rights. By offering preferred shares at a lower price, companies can now attract a wider range of investors who might not have been able to afford these higher-priced shares otherwise.
How does half stock impact investors?
Here’s how purchasing half-stock security can affect your ownership stake as well as any dividend or interest payments you might receive as an investor:
1. Ownership Percentage: Owning half stock gives you smaller ownership or debt holding relative to full stock. However, the advantage is that half stock allows you to gain exposure for 50% less upfront investment.
2. Dividend/Interest Payments: Any dividends or interest will be calculated on the halved face value. So if a typical ₹100 stock ordinarily pays ₹10 dividends yearly, its half-stock equivalent would pay only ₹5 annually aligned to its halved face value.
3. Market Value Fluctuations: While underlying face value defines the initial purchase price, ongoing shifts in the security market value work the same regardless of the face value. The market price depends on changes in investor demand over time. So, half of stocks can realise the same upside profits or downside losses.
Things to consider about half stock
Here are some key considerations if you’re planning to add half-stock to your investment portfolio:
Benefits
- Added Affordability
- Chance to diversify with limited funds
- Entry point for high-priced securities
- Good for small, incremental investing
Drawbacks
- Smaller ownership/debt stake
- Lower dividends/interest payments
- Less influence on corporate decisions
- Still carries investment risks
The better value that half stock offers versus full face value alternatives mainly centres around initial cost. Beyond the purchase price, the half-stock does not guarantee stronger investment performance. As with any investing decision, careful research remains vital, even with more affordable half-stock opportunities.
Is half stock right for you?
Half stock can be a reasonable option if:
- You have limited investment capital
- You believe in a stock/company but cannot afford the full cost
- You want to build small positions over time incrementally
- You have an interest in a special class of reduced-price shares
However, more traditional full-face value stocks may be preferable if:
- You want maximum ownership privileges
- Higher absolute dividend income is a priority
- You plan to acquire many shares for control purposes
- Affordability is not an issue for you
When building your portfolio, the decision between standard and half-stock selections should be driven by your financial situation and investing style, as with most things in investing.
Conclusion
Half stocks are not as common as normal common shares, but they do exist and offer investors a way to participate at a 50% discount compared to full face value prices. However, it’s important to remember that the key advantage of half stocks is the initial cost, and the market will determine longer-term performance regardless of whether you own half or full-value stock. So, it is important to do your research, understand the tradeoffs, and evaluate your motivations and needs as an investor before pursuing any half-stock opportunities.
FAQs
Half stocks refer to shares issued by a company at 50% of their typical face value or par value price per share. So if normal Company ABC shares have a ₹100 face value, half shares will instead sport ₹50 face value written on them.
Companies may issue special classes of half stocks to make their shares more affordable for smaller retail investors by slashing the face value. Another reason is that offering half stock allows firms to sell more shares with fewer ownership grants to raise a targeted financing amount conveniently.
While halved face value reduces the purchase cost of buying half stocks, it also translates into diminished ownership stakes, divided voting rights, and proportionately lowered dividend payouts from those securities.
Key benefits include improved affordability, especially for high-priced securities. It also allows investing smaller amounts incrementally. Downsides relate to measly ownership influence and earnings. Investment risks also persist equally.
Above all, half stocks seem best suited for retail investors having limited investable capital but seeking exposure in stocks they deeply believe in fundamentally yet need help to afford at full ticket sizes initially. Gradual builds also reasonably work through half-stock selections.