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What is Par Value?
Malcolm Tatum
Malcolm Tatum
In finance, par value is the least amount that a share of stock can be sold for, according to the terms and conditions that are found in the regulations of the issuing company. In most cases, the par value will also be the initial trading price for the stock when it is introduced in the market place. However, the expectation is that the par value for the stock will shortly be exceeded by a higher market price.
It is important to remember that the establishment of a par value for a stock offering is essential to the basic structure of any stock. By establishing the minimum amount or price that a stock can be traded, the company makes places a limit on how far the stock can fall before being removed from active trading. This helps protect the company from any attempts to devalue the stock below a certain point and thus make it possible for raiders to acquire cheap stock and a controlling interest in the corporation.
At the same time, the designation of a par value does not in any way inhibit the upward price that the stock can command in an investment market. This is an important point for investors to keep in mind, since the par value is also understood to be the face value as well. This means that the investor will want to look at three factors when considering a stock purchase.
First, the investor will want to determine the current stated value of the stock. This will be the amount he or she will pay per share to acquire the stock. Next, understanding the par value of the stock is important, since that will help the investor know just how low the stock could conceivably go in an extreme situation. Last, the investor will want to look at current indicators that project future performance of the stock. This will help the investor anticipate changes in the market that will either result in a return from the investment, or the shares of stock beginning a downward trend that will bring the market value of the shares closer to the par value rate.
Malcolm Tatum
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
Learn more...
Malcolm Tatum
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
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Discussion Comments
If a stock is currently selling on the market at $1.60, and the company issues additional stock at a par value of .001, can the new stock be purchased for .001 on the open market? If so, how? Also, will the new stock offerings be co-mingled with the stock already on the market, thus bringing the price of the stock quickly to a higher level?
The corporate owners determine the par value at the time they file Articles of Incorporation.
@anon22726 – Par value is determined by the company who is opening the stock to trading. The par value is generally considered to be a dollar amount that represents the value of each share in terms of the cash and/or goods that were required to generate that share.
Basically, for every share of stock, a certain amount of cash, goods, and services was required to provide that stock. The par value is the lowest price the company is willing to accept for what they have done to create that stock.
Think of it as a company is divided into 20 stocks. In order to determine the lowest value that would be acceptable for the stock, the company determines a dollar value that represents the amount of cash, goods, and services that were required to generate 1/20 of the company.
This dollar value is then assigned as the par value of the stock. In this way, should stock prices fall so drastically that the value of the stock would have gone below the par value, the company is protecting itself and its investors from losing everything by investing in the company. This then provides the company with capital to build itself back up so that the stock price can rise again.
Is the par value stated in the charter of a corporation or is it set at a later date? Does the par value of stock change? --Michelle
Thanks. Good info.
What determines the par value? And does it really have a role to play in the modern world?
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