What Is Par Value of Shares and Why Does It Matter?
Uncover the historical purpose and current significance of par value in corporate shares, its accounting role, and how it differs from market price.
Defining Par Value
Par value, also known as nominal or face value, represents an arbitrary monetary amount assigned to a share of stock when a company is initially formed. This value is stated in the company’s organizational documents, such as its corporate charter. It is often a very small figure, like a fraction of a cent per share, or can even be set at zero.
Historical Context of Par Value
The concept of par value originated as a legal mechanism intended to protect a company’s creditors. In earlier times, it ensured a minimum amount of capital was paid into the company for each share issued. This prevented “watered stock,” where shares were issued for less than their nominal value, potentially misleading creditors about the company’s capital. Par value functioned as a floor, below which shares could not be originally issued without potentially exposing shareholders to liability for the difference.
Par Value in Modern Finance
Despite its historical significance, the relevance of par value has diminished in modern finance. Many jurisdictions now permit companies to issue no-par value stock, or shares with a very low nominal par value, such as $0.0001 per share. Its original role in safeguarding creditors has been superseded by other financial regulations and legal statutes. For most companies, particularly those actively traded on public exchanges, par value holds little practical significance in day-to-day operations or investment decisions.
Par Value and Share Accounting
On a company’s financial statements, par value plays a role in the equity section. The aggregate par value of all issued shares is recorded in an account labeled “Common Stock” or “Preferred Stock.” Any amount received from the sale of shares that exceeds their par value is then allocated to a separate equity account known as “Additional Paid-in Capital” (APIC) or “Paid-in Capital in Excess of Par.” For instance, if a company issues shares with a par value of $0.01 for an issue price of $10 per share, $0.01 per share would be credited to the common stock account, while the remaining $9.99 per share would be recorded in the additional paid-in capital account. This accounting treatment separates the nominal capital from the capital contributed above par.
Distinguishing Par Value from Market Value
Par value and market value are entirely distinct concepts. Par value is a fixed, arbitrary figure established in the company’s charter and remains constant for each share. In contrast, market value, or the share price, is the fluctuating price at which shares are bought and sold on an open exchange. This market price is determined by numerous factors, including investor demand, company performance, economic conditions, and market sentiment. Consequently, par value rarely equals the market value, and it has no influence on the share’s trading price in the financial markets.