Concept of Valuation of Shares
Valuation of shares is the process of determining the fair value of the company shares. The value of every share is printed in front of the shares. It is the process of knowing the value of the company’s shares. Such a value is called par value or face value of shares. The face value is assigned by the promoters of the joint-stock company and is given in the memorandum of association. Except for the face value, it has also get market value on the stock exchange market which may differ from face value.
The market value of a share is determined by demand and supply. Share valuation is done based on quantitative techniques and share value will vary depending on the market demand and supply. Such a value is affected by the action and opinions of investors and their fear, guess, investment policy, etc. Hence, the market price does not reflect the true value of shares and requires a proper valuation of shares. Especially, in the case of a private limited company the shares of such a company are not freely purchased and sold to the public. In that case, the valuation becomes absolutely necessary. The benefit to you is to help you to settle on better investment choices.
Some of the instances where the valuation of shares is important:
- One of the important reason is when you are about to sell your business and you wanted to know your business value,
- When you approach your bank for a loan based on shares as security,
- Merger, acquisition, reconstruction, amalgamation, etc – valuation of shares is very important,
- When your company shares are to be converted i.e. from preference to equity,
- For tax assessments under the wealth tax or gift tax acts,
- In case of litigation, where share valuation is legally required.
The value of shares can be determined in different ways. Valuation of shares should be meaningfully provided the above assumptions are satisfied. It can be valued either by taking the earning of a company or net assets that comprise the company. The choice is governed by the reasons for investment. There could be different approaches for the valuation of shares — such as Asset-based approach, Income-based approach or Market approach.