Bonds, common stock, and preferred stock all have a par value; however, the par value is different for each type of security. Read on, and we’ll explain how par value works.
The security’s issuer sets the par value. One of par value’s benefits is that it remains fixed for the life of a security. A security’s market value, on the other hand, fluctuates with supply, demand, and market changes. For example, a common stock could have a par value of $0.01 but a market value of $500. Continue reading to find out how that works.
For common stock, the par value definition refers to the value of the stock as stated in a business’s corporate charter. Shares usually have no par value or very low par value, such as one cent per share. As we mentioned, the par value and the market price often have little relationship with one another. Some states require that companies set a par value below which shares cannot be sold. To comply with state regulations, many companies set a par value for their stocks at mere pennies—or less!
While par value may not matter as much in pricing stocks, the definition of par value is very important to bonds. Typically the par value of bonds is around $1000. Remember, a bond is a written IOU stating the business will pay the bondholder back on a certain date. In the bond world, the par value of a bond states the exact amount of money that a company will pay back to a bondholder on the maturity date of the bond.
The definition of par value is an important thing to know about in investing. It is equally important to know for those who are starting to form a corporation. Entrepreneurs need to know what the par value of their corporation’s stock is, as it sets the capitalization target for their business. Par value advantages include the fact that the small business owner of a new corporation can sell their stock above the par value—thereby generating additional capital for the business.
Entrepreneurs also need to understand par value because it means that no shares will be sold below the par value. Par value disadvantages include the negative repercussions of setting your par value too low or too high. You’ll need to be realistic about the value of your company when setting up your corporation. This will help you to avoid cornering yourself by setting the par value of your shares too high or too low.
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Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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