Par Value Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Par Value, written in plain English, along with examples of how it is used.
What is Par Value?
Refers to the value assigned to the equity or the stock at the initial listing of the company. This ensures the shareholders investing, that noone else is getting the stock at a price lower than par value on listing. In case of bonds, it refers to the face value of the bonds.
History and Meaning of Par Value
Par value is a term used in finance that has been in use for over a century. It refers to the lowest value that shares of a company can be issued for at the time of its initial public offering (IPO). Essentially, the par value is the price of a stock set by the company itself, and it indicates the minimum amount a shareholder must pay to purchase a share. Par value used to have a legal significance, but in modern financial systems, it is more of an accounting formality.
Examples of Par Value
Here are a few examples of how par value might be used in different contexts:
- A company decides to go public, and it sets the par value for its shares at $1. This means that no investor can buy shares for less than $1 each.
- A company issues bonds with a par value of $1000 each. This means that the face value of each bond is $1000.
- A company's stock is worth $50 per share on the open market, but its par value is set at $1. This means there is a significant difference between the actual value of the stock and the minimum price it can be sold for.
- A company is required to maintain a certain amount of equity on its balance sheet, and it uses the par value of its shares to calculate that equity.
- A company's board of directors is discussing a stock split, and they need to decide whether or not to adjust the par value of their shares as part of the split.
Legal Terms Similar to Par Value
Here are a few related terms that are sometimes used in the same context as par value:
- Authorized Share Capital - This term refers to the total number of shares that a company is allowed to issue, as defined in its articles of incorporation.
- Issued Shares - These are the shares of a company that have been sold or otherwise issued to shareholders.
- Treasury Shares - These are shares of a company that have been repurchased by the company itself and are held in its treasury.