Par value, also known as face value, is the stated value of a financial instrument, such as a share of stock, bond, or coupon. It is mentioned on the stock or bond certificate when anyone invests in it. It is a significant part of fixed-income securities since it provides a contractual agreement between the lender and the issuing body. On the other hand, market price is the amount at which an asset is sold in the market. The forces of demand and supply determine it.
Though par value and market price are different concepts, their one similarity is that they affect financial instruments. Let’s find out more about these terms and why they are so crucial to understand in the following section.
Importance of Par Value
Par value holds immense significance for different categories of securities. And its significance is also different depending on the kind of security it is. Find out more about it from the following points.
Par Value of Bonds
Par value in bonds means that the issuer will repay the lender at its specific value. It can be either above par, below it, or at par, depending on the economy’s interest rates.
Par Value of Stocks
Stocks’ par value is the minimum sum at which an organisation can sell its shares to people. Stocks are how organisations get their capital or equity. So, the par value of the stocks is the minimum sum an organisation can get if it sells all its stocks.
Par Value of Preferred Stocks
The par value of the preferred stocks is the minimum sum at which shareholders can buy the preference shares. It is also the sum at which the dividends are paid to the shareholders.
How is a Stock’s Par Value Determined?
A company sets a par value based on several factors depending on the common stocks offered. But, the agreed value of a share must meet the organisation’s objectives in the following areas:
- Position of the initial owners and the number of public shares offered
- Initial capitalisation target
- Forecast of share price fluctuations after the shares have already been offered in the market
How Does Market Price Work?
The market price can change because of the demand or the supply of any financial instrument. And it is the most recent amount at which an instrument was traded. For instance, the market prices are a result of the interaction between the investors, traders, and dealers in stock trading. A seller and a buyer must agree on a price for a trade to occur. Sellers represent the offers, and buyers provide the bids. As such, offers and bids keep fluctuating as buyers continuously change their bids.
On the other hand, the market price in the bond market is called the clean price since it is the last reported amount that does not include accrued interest.
Wrapping Up!
The par value and the market price are crucial concepts when you want to invest in stocks, bonds or anything else. However, the way they affect your investment journey is a little different. For instance, par value remains stable, but the market price keeps fluctuating due to economic conditions. Also, a company does not have to set a par value all the time, but every security trading is related to a market price. As such, learn more about par value and market price by visiting GoldenPi.
FAQs
1. Is par value the same as fair value?
Par value and fair value are not the same concepts. A par value is the price set by an organisation for its shares. Whereas, fair value is the price at which a buyer and a seller agree to trade.
2. How is the market price different from the market value?
The market price is the amount at which an instrument is sold. It is influenced by supply and demand, along with the amount that the investor is willing to pay and the seller is likely to accept. Meanwhile, market value describes the worth of an asset in a market. It is not the same as the market price in most cases, but it can be similar if a fair market exists.
3. How do you determine the par value of a share?
The par value of a share can be determined by dividing the company’s total assets by the number of shares issued.
