Par Value of Stock Meaning, Formula, and Example
Meaning
Par value of stock refers to the face value or nominal value of shares or the stock price stated in a corporation’s charter. In other words, it is the lowest legal price for which a corporation may sell its shares. It does not have anything to do with the actual worth of a corporation’s shares or how much they are sold. It is rather an old legal accounting concept that the corporation laws of some states mandated. Also, it is the price that a company determines to go for initial public offerings (IPO).
The motive behind the concept of the par value is for investors to have the assurance that an issuing company would not issue shares at a price below the par value. However, the par value now is usually set at a minimal amount such as $0.01 per share, since some state laws state that a company cannot sell shares at a price lower than the par value. By setting the par value at the lowest possible currency unit, a company avoids any trouble associated with future sales of stock if its shares begin selling in the penny stock range.
There are states that allow companies to issue shares without par value at all such that there is no theoretical minimum price above which a company can sell its stock. However, companies that issue stocks with par value must still record the par value amount of their outstanding stock in a separate account.
With this, we can say that a share does not need to have a face value as there are no par stocks and the concept has not much relevance in the stock market. this is because it does not have any influence on stock prices. However, on the basis of legislation in many states, it is not possible for a stock to be traded below its face value. Therefore, companies usually set a minimum amount as face value.
Also in some states, when a corporation comes into existence, it is compulsory for the articles of incorporation to set a par value of stock. Everyone buying shares in the corporation including the founders of the corporation must pay at least this amount. If they pay less, then it means that they will owe the corporation the difference.
For example, if a corporation sets a par value for its shares at $1, then all stock purchasers must pay at least this amount for each share they purchase. In essence, if a purchaser buys 10,000 shares, it will have to pay at least $10,000 for them. If on the other hand, this purchaser pays $5,000, then he will owe the corporation $5,000. If the corporation later goes out of business, its creditors can sue to force the purchaser to pay that remaining amount to the deceased firm to pay off its debts.
Usually, the par value amount of a share of stock is printed on the face of a stock certificate. If on the other hand, the stock does not have any par value, then “no par value” will be stated on the certificate.
Generally, the issue price is the sum of the face value and premium amount. So, from the equity section of the balance sheet or other documents such as the 10-k form, stakeholders will be able to read the par value of common stocks and preferred stocks. For instance, Netflix Inc’s face value is $0.001.
When shares have a par value, the amount shareholders pay for them in excess of par is recorded as paid-in capital on the corporation’s balance sheet. For example, if a shareholder pays $5 for 1000 shares and the par value is $1, $4,000 would be credited to the paid-in capital account of the corporation and $1,000 to the common stock account.
How to calculate par value
If there is a need to calculate the par value differently, then one can figure it out using a common stock calculator. First of all, it is recommended that one gathers the necessary information and figures. Also, there is a need to work with the equity section of the balance sheet since par value is a representation of legal capital. Again, one should start by looking for the common stock line item in that section. It is mandatory for publicly traded companies to include their individual stocks’ par value in that section somewhere, so you can read through it until you find it.
Look out for the total number of shares issued and there is no cause for alarm if the figure is gigantic. An initial public offering is a process in which an organization first goes public by selling shares on the stock exchange. That number can increase rapidly if the IPO is successful and large corporations usually have shares in billions. To figure out the par value of stock of the entire organization, one has to multiply the par value per share by the total number of shares issued by the company. The figure will give you the organization’s overall par value.
Generally, it is mandatory for a corporation to disclose the par value of stock on its balance sheet. However, if the corporation does not, it is possible to calculate the par value. In order to calculate the par value, there is a need to know the amount of common stock outstanding and the balance sheet amount of common stock. Information with regard to these items is readily available in the company’s financial statements.
Formula
Par value can be calculated on a per share basis and common stock basis as represented in the formula below;
Par value per share = Common stock/outstanding shares
Par value of common stock = Par value per share x Number of issued shares
Par value of stock examples
Example 1
Step 1
Here, the first step is to find the book value of the common stock on the company’s balance sheet. It is critical to be careful with numbers in terms of thousands and millions of dollars in order to eliminate the use of too many zeros. Let us take, for example, the balance sheet of a company shows the book value of the common stock as $1,000 (in millions of dollars), the actual amount will be $1,000,000.
Step 2
Look out for the number of common shares. Let us assume that in the example, the company has 500,000 shares outstanding.
Step 3
Divide the book value of common shares by the number of outstanding shares.
Still using the example, substitute the figures in the formula;
Par value per share = Common stock/outstanding shares
Par value per share = $1,000,000/500,000
Par value per share = $2
Example 2
In the first example, we succeeded in calculating the par value on a per share basis. Now, let us assume that from the equity section of a company’s balance sheet, the par value per share is $2 and the number of common stock issued is 6,495,231,088.
Using the formula;
Par value of common stock = Par value per share x Number of issued shares
Par value of common stock = $2 x 6,495,231,088
Par value of common stock = $12,990,462,176
