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You may not be able to invest in Apple for fractions of a penny, but you can learn more about how par value plays into things like dividend payments.
So what is par value?
Why do companies tend to set their par value so low?
Is par value even relevant to look at when you’re investing?
With 56% of Americans owning stock, it’s essential to understand not just the stock market, but the complicated terminology that goes along with it.
Par value is a term that entities assign to both stocks and bonds.
In this article, we’re focusing on par value for stocks.
We’ll break down the meaning of par value, how it is calculated, and how it factors into preferred and common stocks.
If you’re ready to learn about par value and how it can affect your stock investments, let’s get started!
What is Par Value?
Par value refers to the assigned value of a stock or bond and is also referred to as face value and nominal value.
The security issuer sets the par value, and often you can find par value printed on the stock.
Companies set par value for the lifetime of the stock.
This is different from the market value, which can fluctuate over time.
Used mostly as an accounting concept, par value designates a minimum value for a stock. Companies use this to ensure a minimum payment in situations like bankruptcy. For example, a stock’s par value may be listed at $1 per share.
Say you buy 5,000 shares but only pay $2,500.
If the company files for bankruptcy, the company can sue for the minimum value owed.
In this case, it’s $2,500.
We’ll walk you through the details on par value for stocks and why this is especially important if you receive dividends from your stocks.
Par Value Formula
You can use the par value formula for both common and preferred stock. Par value is a simple calculation:
Par value = (Number of shares issued) x (Par value per share)
An example of this would be a company that issues 2,000 shares at $2 piece of preferred stock.
Using the formula:
2,000 shares issued X $2 per share = $4,000 par value
If both preferred and common exist, then the formula is done separately for both types, then the amount is added together.
Par Value for Preferred Stock
Preferred stock often pays dividends, and companies calculate the dividends based on par value.
Think of preferred stocks as a hybrid of bonds and common stocks. You own a portion of the company (like common stock), but you also get dividend payments (like a bond).
When dividends are calculated, they are listed as a percentage called the coupon rate.
You multiply the coupon rate by the stock’s par value to find the dividend.
Par Value for Common Stock
Par value is less influential on common stock. Investors buy and sell common stock using market value, so they often overlook par value.
But it does play a factor as an agreement that the company will not sell shares below par value.
You do not use par value to calculate dividends for common stock.
Instead, dividend calculations are a dollar amount per share when they are given out.
No Par Value Stock
There is such a thing as no par value stock.
But what is it?
Some states require that companies assign par value to stocks, but other states do not. If no par value is required, some companies will opt not to set a value to their stocks.
Since no baseline values are assigned to the stock, no-par value stocks have lower liabilities. But often, companies assign a small amount to traditional par value.
There is little difference between par value and no-par value stocks in most cases.
Par Value: FAQs
Next, we’ll take a look at some of the most commonly asked questions associated with par value.
Par value vs market value: What’s the difference?
Par value is the assigned value that the company gives the stock. The market value is what the market is willing to pay for as it is bought and sold on the stock exchange.
Market value can be higher or lower than the par value.
Par value vs face value: What’s the difference?
There is no difference between face value and par value.
The Bottom Line: Par Value
Par value is the assigned face value of a stock. It’s essential for calculating dividend amounts for preferred stockholders.
Keep in mind that not all stocks have a par value, and when they do, the value tends to be very low.
Par value plays a role in how companies value themselves and can affect dividend payments and issues involving bankruptcy.
It’s one of the many stock investing terms to understand so that you can make wise (and profitable) investing decisions.