Par value per share: The stated value per share – is of no practical value
In short:
The par value of stock, also called the par value of shares, is the stated minimum value, or redemption value, of a share that a shareholder can demand from the company in exchange for their shares. This should not be confused with a share buyback where the company is the one initiating buying shares.
While the par value of stock was once a meaningful issue for those owning stock, today, par value of stock is essentially irrelevant.
Additionally, do not confuse par value of stock with par value of bonds as these are two different concepts.
Key Points
- Par value is the minimum but not the maximum a company can require for its shares.
- Par value and market value are not connected or influenced by each other in any way.
- Today, par value of stock is effectively irrelevant.
- Not all companies issue stock with a par value.
In-depth:
Par Value of Stock History – Background
To understand the history of par value stock you need to understand the two ways a company funds its operations. That is, a company can choose to fund its operations with debt which often comes from issuing bonds. Or the company can fund its operations is through equity (selling ownership) which comes from offering stock. Typically, a company will raise its initial funds from a combination of the two.
When raising capital via debt through bonds, a company must assign a face value or par value to the bond. The par value for the bond states what the bond is worth to the company and often the amount an investor must pay in order to buy a bond from the company. After the term of the bond expires the company returns to the bondholder the par value of the bond. This method of par value helps establish the value of the bond when it is first issued.
But what about with stock and raising capital through equity?
In the old days (1800s and early 1900s) companies often used the same par value method to establish the value of stock as well. A share would be issued with a par value normally of $100 and capital would be raised similarly to the way it was with bonds but minus the expiration day.
However, there is a problem with this process.
Often, the par value of stock ended up being a fictitious value that did not represent book value or market value of the shares. This is because the value of stock is almost entirely dependent on the earnings of a company, so as earnings change the value of the shares change.
Ultimately, for this reason, many states around the 1910s started to change laws that required a par value and companies started to set the par value to 1¢. In both cases, the companies and the states acknowledged the lack of true relevance a par value of stock had.
How Par Value Stock Works
Par value is the minimum but not the maximum a company can require for its shares. So, if a company has a stock with a par value of 1¢ they can still require $26 per share from investors. To understand this better consider our example.
Let’s say a company needs to raise capital and opts to raise this capital via a common stock offering. In our scenario, the company plans to issue 1 million shares of common stock with a par value of $100. If all goes right, the company should receive at least $100 million after issuing these shares.
However, if investors do not believe the company’s shares are worth $100, then the company may find it extremely difficult to raise the capital it desired as investors will be unwilling to pay $100. Additionally, if the company would become financially distressed and stockholders bought shares below their par value, those shareholders may be legally liable to cover the difference between what they paid and the par value to pay creditors.
Par Value vs Market Value
Today, most companies set par value to a small figure such as 1¢ or choose not to issue a par value at all. This is a reflection of the realization that par value has no tangible bearing on the value of common stock. Instead, the value of the stock will be determined by the price investors are willing to pay on an open market for the companies shares.
When we extend this out further, the market value of shares will be a reflection of three things. The current earnings of the company, the future growth outlook of those earnings, and the risk associated with those earnings.
As you can expect, these three variables will change over time and according to different circumstances. When they do, the market value of the shares will change and almost certainly not align with any fixed par value assigned to the stock.
Frequently Asked Questions
Par value of stock is legally significant in two ways. First, it is the minimum value a company may sell its shares for. Second, any shares sold for less than the par value may be required to pay the difference from what they paid to the par value in the event of the company’s bankruptcy.
Today, par value of stock has no real importance to stockholders as it neither represents the true value of the shares nor, in most cases, a financial liability.
Stock par value is low as to not require initial purchasers or founders to pay a large amount for their shares or be on the hook for the difference between what they paid for their shares and what the par value of those shares are in the event of bankruptcy.
Par value per share is not calculated. It is an arbitrary value assigned to the shares when first issued by a company. Par value represents the minimum value of shares when issued but beyond that has no real significance.