Definition
Par value of a share refers to the minimum price at which a company’s share can be initially sold in the market, as determined by the company’s charter. It is also known as face value or nominal value. However, after the initial selling, shares may trade at market value, which can be above or below the par value.
Key Takeaways
- Par Value of a Share represents the initial price at which shares are issued by a corporation. It is considered as the minimum legal capital which a company must maintain to protect its creditors.
- While in its original use, par value represented the actual value of a share, today it often bears no correlation to market price. Instead, it is often a nominal or symbolic amount.
- Par Value plays an important role in bond market because it represents the amount that bond issuers promise to return to bondholders at maturity. For common and preferred stock, this feature is not valid and often has little effect on price.
Importance
The par value of a share is important because it is the minimum price at which a corporation can issue its shares. This dollar amount becomes the company’s legal capital and is used as a protective measure for creditors by preventing a corporation from issuing shares below this price.
Additionally, par value also plays a role in the calculation of dividends and bond yields. Often, the par value bears no relation to the market value of the stock.
Despite its nominal designation, par value is fundamental to understand the corporate structure and stock valuation. As an integral part of financial analysis and accounting, it provides substantial information about stock capital and a company’s financial health.
Explanation
Par value of a share serves as an important financial metric for a company’s shareholders, creditors, and management. It represents the value assigned to a share of stock in the company’s articles of incorporation. The primary use of par value is for a company’s accounting purposes.
It is a minimum price at which a corporation can issue its shares. It is also commonly used in calculating legal capital or share capital in the balance sheet, a mandatory financial parameter set by regulation to protect creditors by ensuring that businesses cannot dissipate all their assets to the owners without addressing their liabilities. Moreover, par value also helps standardize trading.
A share’s par value can serve as a benchmark for investors when trying to assess the reasonable price for the stock under different market conditions. It is noteworthy that the issued share’s market value often differs vastly from its par value, given that it is more a result of market supply-demand dynamics rather than an arbitrary assignment by the company. This means the shares can trade more or less than their par value, reflecting the company’s true financial health and the market’s perception of its future growth potential.
Examples of Par Value of Share
Example 1: Apple Inc. – According to the financial statements of Apple Inc, the par value of a share is set at $
It is a very small amount to make their balance sheet simpler and cleaner. It essentially means the minimum price at which the company’s shares can be sold.
Example 2: Google (Alphabet Inc.) – When Google went public, the par value of their shares was stated to be $
This low par value is often used by companies to limit their liability should the company become insolvent.
Example 3: Berkshire Hathaway – Berkshire Hathaway, led by Warren Buffet, has shares with a par value of $5 per share. In this case, the par value is significantly higher than in the previously mentioned companies, which can be used as an indicator that the company values its shares at a higher price. However, the market price of Berkshire Hathaway’s shares is much higher than its par value. This example shows that par value is typically of little relevance to the market value of a company’s shares.
Frequently Asked Questions: Par Value of Share
What does Par Value of Share mean?
Par Value of Share refers to the minimum price that a company will sell its shares for. The par value is normally set at the time when a company is incorporated and can occasionally change over time.
Does the Par Value of Share affect the market value of the share?
Not necessarily. The par value of a share has no influence on its market price. The market price is usually determined by factors such as supply and demand, company’s earnings, growth prospects and the general economic conditions.
Can the Par Value of Share be changed?
Yes, but this requires a formal amendment to the company’s charter which must be approved by shareholders. There is normally quite a lot of paperwork involved, so companies usually set their par value at a nominal amount and rarely change it.
What is the significance of the Par Value of Share?
The Par Value of Share is vital for determining the legal capital of the company. Any company cannot sell its shares below the par value. It guarantees that the stock will retain at least this minimum value.
What happens if a company issues shares below its Par Value?
If a company issues shares below its par value, it may be legally liable to its shareholders for the difference between the par value and the issue price. This is known as a “watered stock.”
Related Entrepreneurship Terms
Sure, here’s the list in HTML bullet-point format:
- Face Value
- Preferred Stock
- Common Stock
- Share Capital
- Dividend
Sources for More Information
- Investopedia: This is a leading global source of financial content on the web that offers definitions and explanations of all finance-related terms, including the Par Value of Share.
- Corporate Finance Institute (CFI): This is a professional courses institute about corporate finance. It provides detailed insights into the Par Value of Share in their educational resources related to corporate finance.
- Accounting Tools: This source provides a wealth of information about accounting principles and definitions, including the Par Value of Share.
- The Balance: The Balance makes personal finance easy by answering your questions and explaining complex financial concepts, including the Par Value of Share.
