When investing in securities, investors may come across various terms that are relevant to the process. Some of these terms relate to the value of the underlying product in which they invest. Usually, they include face value, market value, par value, and several other terms. For most investors, these terms can be highly crucial in differentiating the returns and benefits they get.
For an average investor, all the terms associated with pricing can be confusing. These terms can have several implications, which require an essential understanding of the prices. Similarly, these values can apply to various investments, including stocks and bonds. However, they may have different meanings based on the underlying security to which they relate.
In most cases, investors must understand two primary prices or values. These include the market value and par value of the underlying securities. Through these values, they can determine the returns they can get or the price they will pay for it. There are several differences between these terms. However, it is crucial to understand what each of these means individually.
What is the Par value?
The term par value refers to the price set for security by its issuer. Another term used for this value is face value. However, face value refers to the price imprinted on the security or asset, usually the same as its par value. The term par value can differ based on whether it applies to stocks or bonds. In both cases, this price comes from the issuer. However, they can have different implications.
The par value of shares refers to the price set for those shares by the company. Usually, establishing this price is mandatory under legal and regulatory requirements. Companies must determine this amount before distributing or issuing shares in the market. In practice, however, the par value of shares does not have any significant implications. However, it is crucial under legal requirements. Similarly, it also contributes to the accounting for shares.
On the other hand, the par value of bonds is the amount that investors will get on maturity. In other words, it is the amount that the bond issuer will pay the investor when it reaches its expiration date. The par value of bonds is also critical in determining the interest that investors will receive on these securities. However, it may differ from the amount that the investor actually pays the issuer.
The par value is only the amount that issuers set for their security or asset. In the case of stocks, it does not have any implications but sets the minimum amount that the company can charge for them. In contrast, for bonds, it is the amount that investors will receive on the maturity date. Therefore, the only factor that is crucial to setting the par value is the issuer.
Overall, the par value is the amount that appears on a financial instrument. In most cases, it is the price that the issuer sets for their security. However, it does not relate to the amount the issuer will receive when it issues the security. The par value is only crucial for legal requirements for shares, while it can also contribute to the accounting process. For bonds, on the other hand, it establishes the issuer’s obligations to repay the investor.
What is the Market value?
Market value is a term used to determine an asset’s price in a marketplace. Another term used to describe this value is the open market valuation or OMV. In most cases, it refers to the amount a willing market participant will pay to receive an asset on a specific date. For most securities, the market value will differ based on the market where the investor is active.
The market value is significantly more crucial compared to the par or face value. In most cases, it applies more to the investor rather than the security issuer. Since it determines the price the investor must pay for the underlying asset, it can dictate the value they receive. In most cases, the market value applies to both shares and bonds similarly. However, it may differ based on the market conditions.
The primary contributing factor to an asset’s market value is the market forces. Usually, these forces involve how the market perceives the underlying security and the issuer. On top of these, several other factors may contribute to the market value of an asset. However, these factors are arbitrary and unpredictable. Therefore, investors cannot forecast the market value.
The market value of shares is the price that investors will pay for it on the stock market. For private companies, it is the amount that an investor determines the stock to be worth. Another term used to describe this value is market capitalization. When evaluating a company, investors determine the market value and compare it to their own calculations. This way, they can understand whether the stock is over-or undervalued.
The market value of a bond is also the amount the investors will pay to purchase it in the market. However, this value depends on the interest rate prevalent in the market, among other market factors. In most cases, it differs from the face value of the bond during the interest payment period. As the band comes closer to maturity, the market value and face value converge.
Par value vs Market value: What are the differences?
There are several differences between par value and market value. As mentioned, investors must understand these differences to know how their returns and benefits will differ. The above definitions of both terms helped clarify what each of these was. However, it is crucial to look at the differences between them as well. Some of the primary ways in which par value and market value are different areas below.
As mentioned, the par value or face value of security comes from its issuer. Usually, they set this amount before issuing it to investors. In contrast, the market value comes from the market in which those securities exist. The issuer does not have a say in how much this value will be. Instead, market forces determine how the market value of a security will change.
In accounting, the par value is more crucial than the market value. The par value of security determines its book value on the financial statements. However, the market value does not have any impact on how companies account for those securities. Usually, the par value helps determine the amount of equity or liability that the issuer reports on its books.
The source of the par value of a security is the issuer. As mentioned, this value usually gets imprinted on the stock or bond certificate. On top of that, it may also appear on the asset’s face, thus, getting its name face value. On the other hand, the market value comes from the market. Therefore, the primary source for this value is the stock or bond market.
In most circumstances, a security’s par value will be below its market value. In the case of stocks, the par value is a legal requirement only. Therefore, companies set it at the lowest to get more funds. However, its market value will be higher based on various factors. For bonds, the par value and market value are only similar at the maturity date. Apart from this, they usually differ based on market interest rates.
The par value and market value are terms that are crucial for investors when investing in the market. The par value of security refers to the amount set by the issuer for that security. On the other hand, the market value is the price for a stock or bond in the market. Both these terms differ from each other in several ways, some of which are available above.