Par Value
Candlefocus EditorPar value is defined as the official, face value of a security, such as a stock or a bond. The value of a security reflects the original amount that was assigned to each stock or bond when a company issues it. This value can differ from its market value, which is the current price that people are prepared to buy or sell the stock or bond for on the open market.
For stocks, par value is usually very small and is often a number like 0.01 or 0.0001. Corporate charters usually state that each share of common stock holds a par value of $0.01, but the actual market value of a share of stock is determined by bidding on the open market and can be higher or lower.
Par value is also important for bonds because it is the basis for the maturity value and coupon interest payments. Bonds are fixed-income instruments, typically issued with a set face value known as par value. The value of the bond at maturity will generally be equal to the face value and if bonds have coupons the coupon payments generally have a value equaling the par value.
Par value is also a central concept in taxation. For a corporation, the amount of profits that can be legally put towards additional investments instead of taxes, is determined by the difference between the market value of the stock and the par value. This is known as distributable reserves and is equivalent to the difference between the actual market price of the stock and the par value that appears on the corporate charter.
In addition, par value plays an important role in limiting a business owner's liability. For example, when setting up a corporation or a limited liability company, business owners are generally required to provide a liability formation document known as articles of incorporation. This document states the amount of shares to be issued and assigns a par value to each share. By assigning a small amount to each share, business owners can limit their own liability and it is not uncommon to see par values as low as 0.0001.
Understanding the concept of par value is essential to making the right decisions when it comes to stock and bonds. Par value directly contributes to a company's valuation and can affect the treatment of profits for taxation purposes. Moreover, it is an important tool used to limit corporate liability, thus enabling business owners to better manage the company's financial risk.