Par Value Per Share? What You Need to Know!
Understanding corporate finance often requires navigating specific terminology; an important concept is what is par value of a share. Securities and Exchange Commission (SEC) regulations influence how companies, like Apple Inc., handle their stock offerings, making the par value a key consideration. The initial public offering (IPO) of a company often involves setting a par value, even though this value may have limited relevance to the actual market price.
Image taken from the YouTube channel SwiftReg Company Registration , from the video titled Par Value Shares Explained .
Understanding Par Value Per Share: A Comprehensive Guide
This article aims to provide a clear and concise understanding of par value per share, particularly focusing on answering the question "what is par value of a share?" We will break down the concept, its significance, and potential implications for investors and companies.
What is Par Value of a Share? A Core Definition
At its most basic, the par value of a share is a nominal, face value assigned to a share of stock when the company is first incorporated. Think of it as a minimum "stated" value, not necessarily reflective of the actual market value of the share. It's often a very small amount, like $0.01 or $1.00.
- Important Note: The par value is not the price at which the company sells the shares to the public or subsequent investors. The market price is determined by supply and demand.
Why Do Companies Assign Par Value?
While seemingly insignificant in modern investing, par value serves primarily legal and accounting purposes. Historically, it acted as a form of investor protection.
Legal Requirements
- State Regulations: Many states require companies to assign a par value to their stock. This helps determine the amount of capital that must be maintained in the company and protects creditors.
- Legal Capital: Par value is used to calculate a company's "legal capital," which represents the minimum amount of money that the company cannot distribute to shareholders as dividends or share buybacks. This ensures the company retains sufficient assets to cover its liabilities.
Accounting Implications
- Capital Stock Account: When shares are initially sold for more than their par value, the difference is recorded in an additional paid-in capital (APIC) account, also known as share premium.
- Balance Sheet Representation: The par value multiplied by the number of shares issued represents the "capital stock" line on the company's balance sheet. APIC is shown separately.
Illustrative Example of Par Value
Consider a hypothetical company, "Tech Solutions Inc."
- Par Value: $0.01 per share.
- Shares Issued: 1,000,000 shares.
- Initial Selling Price: $10 per share.
Here's how it would be reflected in their accounting:
- Capital Stock: $0.01 (Par Value) x 1,000,000 (Shares Issued) = $10,000
- Additional Paid-in Capital: ($10 - $0.01) x 1,000,000 = $9,990,000
The balance sheet would then show:
| Account | Amount |
|---|---|
| Capital Stock | $10,000 |
| Additional Paid-in Capital | $9,990,000 |
| Total Paid-in Capital | $10,000,000 |
No-Par Value Stock: An Alternative
Some companies issue "no-par value" stock. This means the shares do not have an assigned par value. In these cases, the company's board of directors generally assigns a "stated value" for accounting purposes.
Advantages of No-Par Value Stock
- Flexibility: No-par value stock provides greater flexibility in setting the initial selling price of the shares.
- Reduced Liability: In some jurisdictions, no-par value stock can reduce potential shareholder liability related to undercapitalization.
Accounting Treatment of No-Par Value Stock
- The entire proceeds from the sale of no-par value stock are usually credited to the capital stock account.
- If a "stated value" is assigned, the excess over the stated value, if any, might be credited to APIC.
Is Par Value Important for Investors?
Generally, no. Par value is rarely a significant factor for investors evaluating a company. It provides little to no insight into the actual value of the company or its stock.
Factors More Important to Investors
- Financial Performance: Revenue, earnings, cash flow.
- Market Conditions: Industry trends, competitive landscape.
- Management Quality: Leadership, strategy, execution.
- Valuation Ratios: Price-to-earnings ratio, price-to-sales ratio.
Conclusion Regarding Investor Significance
Focus on the financial health and growth prospects of the company, not the nominal par value of its shares. Understanding "what is par value of a share" is crucial, but its impact on investment decisions is minimal.
Video: Par Value Per Share? What You Need to Know!
