Meaning of Nominal Value
The nominal value of a share is an arbitrary value allotted to that unit. When considering shares, it is usually the market value and not the nominal or book amount which investors and other stakeholders are interested in.
The market value of a share in an established company is likely to be different from that of its nominal value. In cases where the market value is the greater of the two, the difference is called the share premium.
Some commentators believe that there is no real benefit in allocating a higher or lower nominal value to a share. Most new UK limited companies are registered with a book value of £1 each, but it is possible for it to be set as low as £0.0001 pence or conversely, at any denomination above that amount.
In a situation where two separate companies wish to have an authorised share capital of £10,000, they may choose to structure themselves in a number of different ways.
For example, company A may decide to have a nominal value for its shares of 10 pence. It would then require 100,000 shares (10 pence x 100,000) to result in its share capital being 10,000.
Company B, on the other hand chooses a share nominal value of £10 per share. It would therefore require 1,000 shares (£10 x 1,000) so that its authorised share capital was £10,000.
Setting a Nominal Value
Some practical considerations of how much to set a nominal value for a UK limited company are:
- If there are plans to distribute shares to a large number of shareholders, consideration should be given to their capacity to pay a large sum of money (£10 vs. 10 pence) for each unit.
- Having a higher nominal value might result in a company using up its full allocation of authorised shares more quickly than an equivalent incorporated businesses which has a lower nominal value. In the above example, company A had 100,000 shares whilst company B had only 1,000. The latter could consider increasing its authorised share capital in order to provide additional resource.
- The stamp duty payable on the allocation of each share might be higher for a share with a greater nominal value than for one with a lower denomination attached to it. In time however, the market value of the share might grow to exceed the initial nominal value and this higher amount will then be used instead to calculate stamp duty.