Par Value of Share

Par value of shares, also known as the stated value per share, is the minimum value per share as decided by the company issuing such shares to the public. The companies then will not sell such shares to the public below the decided value. In short, it becomes a legal obligation for firms to not sell those shares at anything less than this par price.

This par value of shares decided by a corporate charter is different from the actual value of the shares. In fact, this price is the lowest possible cost that one needs to borne to own a share or stock of a company. It is the price of a security that remains the same throughout its life.

Par value of share is the price of a share or stock initially fixed for a security. Each and every asset in the financial instrument has a par value, but the applicability of each differs. For shares, it is the minimum value at which a security is made accessible and available to investors.

Before raising capital, a corporation owner must be aware of par value though it doesn’t affect the book value of market value by much. By seeing the par value, we should never assume about the book or market value of equity since it doesn’t indicate a perfect picture of the same.

The shares can have either a no par value or low par value, which is the lowest amount that the seller is willing to sell an asset at. This means, the seller has no legal liberty to sell the asset at a price that is less than the par value. Being the original value or the value of the face of the shares or stocks, this price is also known as the face value of that security. It is, however, up to the company issuing shares if it would like to assign a par value to shares or not.

When the companies decide not to assign a par value to shares, it signifies that corporations are not having any legal obligations to their debt holders. The par value is usually so low that no par value also won’t provide much difference. In other words, it is the nominal share amount ($1, $0.1, or $0.001) mentioned on the stock certificate at the time of issuance. It has no meaning and no relation to a share’s market value.

The par or face value of shares remains the same throughout the life of the securities in question. On the contrary, the market value, which is the actual value at which the securities are sold keep changing per market fluctuations. Hence, the latter is variable in nature. However, the par value might not have much effect on the market as the differential amount between the par and market values is not much.

Shareholding of a company is recorded in the balance sheet as Shareholders equity.

The broad classification of Shareholder's equity is that the first one is "paid in capital," which is known as the amount invested by shareholders, and the second one is "Retained Earnings," which comes from the Net Income of the company.

Now when a company issues shares which are having a certain par value, then the total book value of equity will be recorded as follows:

Where,

• Common stock at par = par value * number of shares issued
• Additional paid-in capital= number of shares* (amount at which shares issued – par value)
• Retained earning = Net Income - dividend

Let us consider the following instances to define par value of a share better:

Example #1

To illustrate the example of equity in a balance sheet, let us consider XYZ corporation, which got the approval for the issuance of 2000 shares, which has a par value per share. If these shares were issued at $11 per share, then the transaction will be recorded below in the balance sheet:

In addition, retained earnings for XYZ are $5,000. Then the total book value of equity will be recorded as

Book value of equity = $20,000 +$2,000+$5,000 =$27,000

Example #2

Let’s illustrate the example and issuance of shares' effect on the balance sheet. In March 2017, DMart, a retail chain operator, completed its IPO. It had issued 62,541,806 equity shares with a face value of INR 10 each, but the issuance price of the share was INR 299 per share. That means it has received 62,541,806*299 = INR 187,00 million from IPO. So below would change in its accounts:

Let’s examine below the screenshot of the balance sheet of D-Mart:

In this balance sheet, in the Equity column, two components are mentioned: first is equity share capital, which has changed from 5615.4 million to 6240.7 million from 2016 to 2017. That means change is around 625.4 million. This change is attributed to the value of the common stock at par, which was issued at the time of IPO. Rest additional paid-in capital and retained earnings are being clubbed into the "Other Equity" row. So that's how common stocks are shown on the balance sheet.

Par value or face value of a share is the price that helps sellers know how significant a security type is in the market as this value identifies the minimum amount that sellers can sell it at. There are myriad of benefits that determining this value brings to companies as well as the investors. Let us have a quick look at them below:

• Par Value is an important term for any small business owner to understand before opening a corporation.
• It provides a benchmark that stock prices cannot go below this price.
• Earlier, par value used to be a benchmark that if the share price fell below par value, its shareholders are liable to its creditors for the difference between share price and par value. So low par value helps avoid a company's contingent liability.

Besides the advantages of the par value of shares, there are certain limitations and challenges of computing it, which must be known to companies before issuing shares or stocks and investors before purchasing them. Listed below are some of the disadvantages to have a look at:

• Par value is a notional number that doesn’t say anything about the market value of shares.
• Par values of the bond are an important concept, but the par value usually is so low that its effect on a book value of equity is negligible.
• It rarely affects stock holding or the market price of a share.

This has been a guide to what is Par Value of Share. Here, we explain the concept along with how to calculate it, examples, advantages, and disadvantages. You can also learn more about accounting from the following articles –

• Shares Issued
• What is Vesting of Shares?
• Shares Premium Definition
• Class A Shares