What is the Par Value of Stock?
Par value of stock also known as the face value or nominal value is the minimal value of the common stock of the company that is mentioned incorporate charter of the company as decided by the issuing company below which company will not sell the mentioned stock in the market and the same has no relation with the prevailing market value.
It is the legal value per share that appears on the share certificates and is usually small ($0.01, $0.0001 etc) and is not connected to the market value of shares.
Also, note that the Par value of a stock is quite different than the par value of the bond. In the case of par value (bond), this is the issued price of the bond. On the other hand, for this stock, it’s the legal capital of the company.
Par Value Accounting
If a share is issued at $100 per share, a very meager amount of that is called par value. It’s just $0.10 or $0.01 per share or less. The rest of the amount would be treated as additional paid-in capital. For example, if we say that Company P has issued common stock at $100, this stock of each share would be $0.01 per share and the additional paid-in capital would be $99.99 per share.
If we look at the par value accounting entry for the same, it would be the following –
- We will debit the “Cash Account”. Since cash is an asset and by receiving the money from the shareholders is an enhancement of the asset, cash would be debited.
- But the actual catch lies in the credit amount. We will credit “Common Stock Account” by $0.01 and also “Additional Paid-In Capital Account” by $99.99.
Why is the Par Value so low?
source: Starbucks SEC Filings
As we note from above, the Starbucks par value of a share is $0.001. There’s a particular reason behind the lowest price of the par value. This is the minimum amount per share that has to be paid to purchase the share. That means the company will generate at least the capital that is the product of the par value of common stock and the number of shares.
Low par values of stock help companies avoid a contingent liability.
- If the shareholder pays less than this common stock while purchasing the share and the company in the future is unable to handle its financial obligations; then the shareholders have to the difference of what they should have paid (i.e. the par value) and what they actually paid.
- On the other hand, if the shareholders pay the par value and in near future, the market price of the stock goes below this stock, then the company has to pay the difference to the shareholders.
- To completely avoid these two extreme situations, companies issue shares at a very low (often lowest) par value, i.e. $0.01 per share.
However, common stock can also have no par value. Let’s discover how no par value works.
No par value
We note from above that the China Marketing Media Holding has a no par value.
- The only difference between a par value and a no par value is the minimum legalized amount. It is the minimum price that must be paid to acquire a share.
- In the case of PVS, a minimum base point is set up. And for no par value, no minimum base point is set up.
- Also, note that in the case of no par value, there will be no additional paid-in capital. The whole amount would be transferred to the common stock.
The accounting entry for no par value stock would look like the following –
The whole amount that a shareholder will pay will be credited to a common stock account. Since there’s no base value set up, there will be no additional paid-in capital as well. And the entire amount would be debited to a cash account.
For example, let’s say that Company Q has issued no par value at $100 each share. Now the following would be the entries –
Cash account A/C… Dr $100 –
To Common Stock A/C – $100
Below is China Marketing Media Holding Shareholders Equity section from its 10Q.
Effect of Stock Split on PVS
Stock Splits are done typically to reduce the market value of the shares. The stock splits increases the number of stocks and proportionately reduces the part value of the stock.
Let us have a look at this stock split affect on the par value. 90 Degree Corp has done a 2:1 stock split. Show the accounting entries
We note from above –
- 90 Degree Corp had 10,000 shares before the split and par value was $1.
- Post the 2:1 split, the number of shares increases to 20,000 and par value reduces to $0.5
- Please note that the common stock in both the cases (before and after the split) remains the same at $10,000.
Why should you know about the par value of the stock?
As an investor, you should know the nitty-gritty of the stocks you are investing in.
- It’s also important that you understand the concept of this share and how much capital of a company is legal capital. You should also understand the difference between the par value (bonds) and the par value of the stock so that you understand how to look at the actual issuing price of the stock.
- However, in a real sense, this common stock rarely affects your stock holding or how the stock will do in the market. But if you’re someone who would like to go in detail and want to find out how much a company contributes to its legal capital, you can look into their balance sheet and understand.
Par Value of Common Stock Video
This has been a guide to what is Par Value of Stocks, its meaning along with practical examples? Here we also discuss, accounting, why par value is usually kept low and no par value common stocks. You can also learn more about basic accounting from the following articles –
- Shareholder’s Equity Formula | Example
- Paid in Capital | Explanation
- Example of Contingent Asset
- Current Account vs Capital Account Key Differences
- IFRS vs Indian GAAP Differences
- Starbucks – Share Capital Calculation Example
- Common Stock vs Preferred Stock Differences
- Shareholders Equity Statement
- What are Preferred Shares?