Par Value and Market Value

Par Value and Market Value

Par value and market value of shares are two different concepts, company receives par value and issue shares at par value, then shares are traded in stock exchange at market value and these both concepts has been explained below in details.

1.    Issue Price

Shares are ordinarily issued at par value. It is important to note that sometime share is issue at below price i.e. discounted price (price lower that par value) and above price at premium price (above the par value).

2.    Price Determination

Par value is determined by the company in accordance of regulator guidelines (if any) and does not change during the life of company, where market price is determined by the market forces in stock exchange and changes regularly.

3.    Trading of Shares

Shares are traded in stock exchange at market price of shares, and par values of shares have no significance or role in the shares trading.

4.    Declaration of Dividend

Dividend is declared in relation to par value. If 20% dividend is declared and par value is 100 rupees, then it means that dividend declared is 20 $.

5.    Books of Accounts

Par value is used to record the transaction in books of account; market value has no role in the transaction recording of shares. The recording of transaction has been explained in detail in my other blog article.

6.    Limited Liability

Limited liability concept in case of companies is associated with par value paid by the equity holder, and limited liability does not calculated in relation to market value.

Types of Preference Shares

Types of Preference Shares

Preference shares are issued with promise of fixed dividend.  Preference shares may be classified in terms of dividend accumulation (cumulative and non cumulative preference shares) and in term of redemption (redeemable & irredeemable preference shares).

1.    Cumulative Preference Shares

Cumulative preference share are entitled to receive the dividend in future, if company fails to pay dividend in a particular year. It means dividend is accumulated till the time of payment. Companies normally issue cumulative preference shares, because these shares have more acceptability ratio in the market.

2.    Non cumulative Preference Shares

Non cumulative preference shares dividend does not accumulate and lapse in case of nonpayment. These shares are rarely issued by the company, because investors are not interested in theses shares due to high risk of nonpayment of dividend.

3.    Redeemable Preference Shares

Preference shares are redeemed (buy back by company) at or after some future date.  Companies normally issue redeemable preference share, because most of the investor want to receive their original investment back.

4.    Irredeemable Preference Shares

Irredeemable share are never buy back by the companies. It means you can only receive divided for indefinite period, but investor cannot take back the original investment. These types of shares are offered with very high rate of return.

Types of Ordinary Shares

Types of Ordinary Shares

Ordinary shares are issued to the General public, and these shares are entitled to receive dividend declared by the company. Ordinary shares can be classified into three classes in term of issuance. It is to be noted that after issuance of ordinary shares, all types of ordinary shares become ordinary shares.

1.    Initial Ordinary Shares

Ordinary shares are initially issued to General public against public subscription (deposit of funds). The people apply for these shares against initial public offer made by the companies in the newspaper. The people apply through prospectus (document carries application for shares used by companies’ for shares)

2.    Right Shares

Right share are issued to existing shareholder in proportion to shares held by them. The unaccepted or unsubscribed right shares by existing equity holder may be issued to other investors by stock exchange. Right shares become ordinary shares, once these are issued.

3.    Bonus Shares

Bonus shares are issued to existing shareholder in lieu of cash dividend. These shares become ordinary shares once issued.

Characteristics of Preference Shares

Characteristics of Preference Shares

1.    Different from Ordinary Shares

Preference Share is quite different from ordinary shares, and these shares are issued as long term financing for a fixed divided.

2.    Cumulative Preference Share

In case of cumulative preference shares, the dividend is guaranteed, and may be paid in future, if company could not pay dividend for a particular year. it means that dividend does not lapses for nonpayment , rather accumulates.

3.    Non Cumulative Preference Share

In case of non cumulative preference share divided is only paid, where company can pay the divided, (otherwise it lapses).

4.    Not Traded in Stock Exchange

Preference shares are not traded in stock exchange; therefore they have no marketability. These shares are normally redeemed at particular date (buy back by company).

5.    Form of Loan

Preference shares may be regarded as form of long term loan, where fixed amount of dividend is paid to preference share holder for a particular period of time, and then shares are redeemed by the investor (preference share holder).

6.    Dividend is Fixed

Divided is normally fixed in case of preference shares, while in case of ordinary share dividend varies each year.

7.    No Voting Rights

Preference shares carry no voting rights, as already described that it is kind of long term loan arrangement by the company, therefore preference share does not carry voting rights.