Par Value of Common Stock

by Cam Merritt

"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 price of that share.

Origins

Not all corporations assign a par value to their common stock. Whether a corporation must do so depends on the the laws of the state in which it is incorporated. 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. Historically, there were a couple of reasons for this. First, it allowed the state to assign a bedrock value for the company. If a company had, say, 1 million shares of stock outstanding with a par value of $1 per share, then the company would have a minimum value of $1 million. Second, it assured investors that they wouldn't be overpaying for the stock. If they were paying par value, they could be certain that no one could get a better price.

Setting Par Value

Par value is just a minimum. Nothing prevents a company from selling common stock for more than par value. That's why companies now routinely set their par value at a penny, or even a fraction of a cent. For example, 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. Whatever the par value is, it's meaningless when the company goes to sell shares to the public. The company sells shares at whatever price the market will pay.

Reporting in Financial Statements

A company's financial statements -- specifically the balance sheet and the statement of stockholders' 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 in Other Contexts

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. 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.