Par value is the nominal value for a security.
What Is Par Value?
Par value is the nominal value, or face value, of a security, namely a stock or a bond.
When a company authorizes shares, it also sets the par value for shares to be issued, typically an amount greater than zero. A company’s stock must trade above the minimum legal requirement set by its par value, which means that the stock cannot be bought, sold, or traded at less than its par value. Setting par value, though, depends on the state where a company is chartered. Still, some states don’t set rules on par value.
Par Value Meaning by Security
Par value has a separate meaning for stocks and bonds, and this section outlines the difference.
Par Value for Stocks
For shares of a publicly traded company, the par value represents the legal value that must be maintained. Par value is stated on a stock’s certificate but doesn’t necessarily reflect the market value.
Companies typically set their par value very low to minimize the risk of market price falling below the minimum legal requirement. Many companies set the nominal value at $0.01 a share, while some companies go to the extremity. The par value for Apple’s common stock, for example, is 1/1000 of a cent.
Par Value for Bonds
When it comes to bonds, par value is face value, or the amount a bond can be redeemed for by its holder once it reaches maturity. For example, the U.S. Treasury issues a 10-year bond with a par value of $1,000 that pays interest on a regular basis. The bond can be redeemed at its par value upon maturity, and the Treasury must pay that amount.
When a bond’s price is less than its face value in the open market, it’s trading below par value, or at a discount. In more bond investorspeak, when the price is below face value, it’s above par, or at a premium; at the same price, it’s at par.
Which States Require Par Value?
Some states require companies to set par value when they authorize shares, but the trend is toward removing this provision. Delaware, a popular state of choice for companies to incorporate because of the ease of filing, is among the states no longer requiring par value.
What if a Stock Goes Below Par Value?
If a stock begins to trade below its par value, it would be in violation of a company’s charter and would fail to meet the legal minimum requirement. It would also be a sign that the company is insolvent. If this occurred, shareholders could sue the company to make up the difference. But, because par value is usually set so low, lawsuits rarely happen.
Since the Securities and Exchange Commission doesn’t set rules on establishing par value, it becomes an issue with the state where the company was chartered. Shareholders would file a lawsuit with a court in that state.
Frequently Asked Questions (FAQ)
The following are answers to some of the most common questions investors ask about par value.
What Is Par Value vs Face Value?
Par value is the nominal or face value of a share or a bond. In other words, par value and face value usually mean the same.
Can Par Value Change?
A company can change its stock’s par value, but it would need to make an amendment to its articles of incorporation to do so.
Do Stock Splits Affect Par Value?
A company’s stock price changes following a stock split, but the par value remains the same.
Can Par Value Be Negative?
Par value cannot be negative. A company typically sets its par value at a number greater than zero.
