Par Value of Shares: What Is It and How to Set It?
Whether a bond is trading at a discount or premium, the issuer always repays the par value to the investor at maturity. The par value of shares, or the stated value per share, is the lowest legal price for which a company sells its shares. Bonds have a par value, of course – it’s just the principal amount. Here you’ll learn what that par value represents and how to calculate the company’s par value of common stock for the purpose of financial accounting. When companies go through an initial public offering, they must set the par value of their shares.
Bonds are fixed-income securities issued by corporations and government bodies to raise capital. A bond with a par value of $1,000 really can be redeemed for $1,000 at maturity. In reality, since companies were required by state law to set a par value on their stock, they choose the smallest possible value, often one cent. This penny price is because the par value of a share of stock constitutes a binding two-way contract between the company and the shareholder.
- Some stock, called no-par value stock, is issued with a minimum selling price without violating state minimum legal capital laws.
- A stock’s par value never fluctuates and is determined when shares are issued and formally stated on the stock certificate.
- Par value is also called face value, and that is its literal meaning.
- Investors count on gains made by the changing value of a stock based on company performance and market sentiment.
Shares can have no par value or very low par value, such as a fraction of one cent per share. One of the only circumstances shareholders may be impacted by par value is if the issuing company goes bankrupt and the shareholder acquired the shares of stock for below par value. In this rare circumstance, debtors can legally pursue these shareholders for the difference between what they paid for the shares and the par value. In some states, companies are required by law to set a par value for their stocks. They could also be issued at a premium or a discount depending on the level of interest rates in the economy. A bond that is trading above par is said to be trading at a premium, while a bond trading below par is trading at a discount.
In some states, the par value of common stock issued can’t be withdrawn or used by the issuing company. For this reason, companies often issue common stock with a par value of 1 cent per share or less; in this way, they can avoid tying up excessive amounts of money in stock. Par value is the nominal or face value of a bond, share of stock, or coupon as indicated on a bond or stock certificate. The certificate is issued by the lender and given to a borrower or by a corporate issuer and given to an investor. It is a static value determined at the time of issuance and, unlike market value, it doesn’t fluctuate. As the par value is often no more than a few pennies, it’s a formality to meet certain states’ legal requirements for securities or to help manage taxes for companies.
In other words, they intend to hold on to the bond until it matures. For example, a bond’s YTM may be 10%, meaning you can expect your money to grow by 10% when you consider the interest you’ll earn as well as the return of the par value. If you paid more than par value to buy a bond in the secondary market, the effective interest rate you’d earn on the bond would be lower than the coupon. If you paid less than par value for a bond, the effective interest you’d earn would be higher than the coupon. Shares cannot be sold below this value upon initial public offering to reassure investors that no one is receiving preferential price treatment. If you already have par value and you want to raise or lower it, things are a bit more complicated.
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Preferred stock represents equity in a company—a portion of ownership, like common stock. In addition, though, you are entitled to fixed dividend payments, like a bond’s fixed interest payments. Some common stock may also offer dividends, but these are normally at lower rates and are more likely to be foregone if a company has a hard quarter or year. While preferred stocks’ dividends are not guaranteed like bond interest payments, they are much less likely to be waived. Shares usually have no par value or low par value, such as one cent per share does not reflect a stock’s market price. Some states require that companies set a par value below which shares cannot be sold.
How to Calculate Par Value
Some states calculate legal capital differently, and the addition of “no par value” shares threw a bit of a wrench in the system. As a result, par value has lost much of the importance that it once had—but it’s still lurking around and can trip you up if you’re not careful. Traditionally, par value has https://simple-accounting.org/ been important because of the way it figures into your corporation’s legal capital. Your legal capital is the amount of equity that has to stay in the business. Typically, your legal capital is the total par value of your corporation’s common stock (plus the total stated value of any preferred stock).
When a corporation is formed, the articles of incorporation must set a par value for its common stock, which all shareholders must pay to own each share in the newly incorporated company. Par value is also called face value, and that is its literal meaning. The entity that issues a financial instrument assigns a par value to it.
The par value is stated in the company’s articles of incorporation and figures on the paper stock certificates that companies used to issue. On top of that, the stock certificates companies issue for these shares do not contain a par value. This is typically mentioned in the company’s double‐entry bookkeeping charter or articles of incorporation. The value can be calculated by multiplying the number of authorized shares by their individual par values. Regardless of whether the market price is above or below par, the coupon payments by the bond issuer are dependent on the face value.
Can Shares Be Issued Below Par Value?
Par value, also known as face value or nominal value, serves various legal and accounting purposes, although it does not necessarily reflect a stock’s market value. We’ve discussed why par value matters, including its role in dividend calculations, accounting, and legal liability. Typically, common stock is issued and traded far in excess of the par value, but bonds and preferred stock are issued at or near their par value. This “no-par” status means that the company has not assigned a minimum value to its stock. No-par value stocks do not carry the theoretical liabilities of par value issues since there is no baseline value per share.
In most cases, your legal capital would be $5,000 (5,000 shares x $1). That means you can’t distribute any of that five grand as dividends; you have to hang on to it to protect the corporation and investors in case things go south. For instance, the prices of bonds and preferred stock are very sensitive to changes in interest rates. When interest rates are lower than the coupon rate of a bond, or dividend rate of a preferred stock, the market price rises.
With common stocks, the par value simply represents a legally binding agreement that the company will not sell shares below a certain price, such as $0.01. Shares usually have no par value or low par value, such as one cent per share. Once defined, it is the lowest limit set to the value of a share of stock.
Par Value vs. Market Value
In modern times, the par value assigned is a minimal amount, such as one penny. That avoids any potential legal liability if the stock drops below its par value. When a company or government issues a bond, its par value represents the amount of money the bond will be worth at its maturity date. By issuing no-par stock, the company relinquishes any determination of value for the stock.
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