"Par value" of common stock is something of a historical curiosity – a remnant of the days when financial markets weren't very well regulated and little information about corporations' finances was publicly available. It's best thought of as the face value of a share of common stock, but it has no relation whatsoever to the market value of that share in the open market.
What Is Par Value of Common Stocks?
Not all corporations assign a par value to their common stock. Whether a corporation must do so depends on the laws of the state where the articles of incorporation took place. However, if the stock does have a par value, that amount is defined in the corporate charter, and the corporation is barred from selling stock to the public at any price lower than the par value.
In the past, the par value of common stock used to be written on the stock certificates. And historically, there were a couple of reasons for designating the par value of common stock:
- First, it allowed the state to assign a bedrock value for the company. If a company had a number of shares totaling 1 million shares of stock outstanding with a par value of $1 per share, then the company would have a minimum valuation of $1 million at the time of issuance of shares.
- Second, it assured investors that they wouldn't be overpaying for the stock. If they were paying par value of a share, they could be certain that no one could get a better price since that would be the minimum price.
Setting the Par Value of Common Stock
Par value is just a minimum. Nothing prevents a company from selling common stock for more than par value or in excess of par. That's why companies now routinely set their par value at a penny, or even a fraction of a cent to avoid selling shares at below par value.
For example, the Securities and Exchange Commission shows that Google's stock, like many, has a par value of one-tenth of a cent. Older companies, whose par values were set decades ago, often have higher values. IBM's common stock, for example, has a par value of 20 cents, per the SEC.
So, the chances of trading below par are very low. In fact, some companies may have such expensive stock prices that they undergo a stock split, allowing the current shareholders to increase the number of shares they have and making it affordable for other entrepreneurs to invest in those companies.
Whatever the par value is, it's meaningless when the stock issuer goes to sell shares to the public during the initial public offering (IPO). The company sells shares at the market value, which is whatever price the market will pay.
Reporting in Financial Statements
A company's financial statements – specifically the balance sheet and the statement of shareholder’s equity – must identify how much money the company has received from selling common stock directly to the public. This amount is reported on a line labeled "common stock."
However, for companies whose stock has a par value, the "common stock" line often includes only the par value of the shares that it has sold. Any amount received above the par value is then reported on a separate line, "additional paid-in capital."
Par Value of Other Securities
Par value is next to meaningless, but only in the context of common stock values. Preferred stock – a type of stock that comes with a guaranteed dividend – also has a par value, but the dividend is frequently based on the par value of the stock, explains Investor.gov. So, the par value of preferred shares may be much higher and might even approximate the market price of the shares.
Corporate bonds also have a par value. This is the payment the bondholder receives at maturity, and the bond's interest payments also depend on the par value, so the market price of the bond will be directly influenced by its par value.
This article was written by PocketSense staff. If you have any questions, please reach out to us on our contact us page.