What Is Par in Relationship to Stocks?
There are two values associated with the stock shares issued by corporations: the par value and the market value or price. The relationship between the two prices depends on how the corporation set up the issue of shares and the type of stock shares.
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Function
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The par value of common stocks shares is a bookkeeping number that is required by state regulations concerning the issue of stock to investors. The par value is the lowest price for which new shares can be sold. In states where a par value is required, companies usually issue stock with a par value of one cent. Some states have dropped the requirement for a par value, and companies domiciled in these states will issue common stock without a par value.
Significance
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The one-cent par value gives companies flexibility to sell shares at any value above that price. The result is that the issue or market price of a company's common stock will usually have no relationship to the par value. The par value does not change to reflect the price the stock trades for on the stock exchange. A stock could have a market value of more than $100 per share and the par value would still be a penny.
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Features
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Preferred stock shares are different from common stock shares in relationship to par value. Preferred stock pays regular dividends that are determined as a percentage of the share's par value. This requirement means that the par value of preferred shares will be close to the market value, especially at the time the preferred shares are issued. The par value of preferred shares determines the dividend amount the company must pay on the preferred stock. If a company issues 10 percent preferred stock with a $20 par value, the annual dividend for the stock will be $2.
Considerations
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Investors can use the dividend percentage and par value of preferred stock to determine how much the dividend will be if they invest in the preferred stock. For common stock shares, in most cases outside of penny stocks, the par value and market value of the shares will have no relationship. The par value is printed on any stock certificates that would be issued. In theory, the stock certificates could be turned into the corporation in exchange for the par value.
Effects
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Once a stock is issued and is trading on the stock exchange, the par value is meaningless to investors. Par value is an accounting or bookkeeping requirement only. Corporations can amend their incorporation papers at any time to change the par value of the company's common stock. This can happen when a company declares a stock split, and the result would leave the par value of the common stock below a penny. The incorporation paper can be amended to retain the one-cent par value after the stock split.
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