What is common stock par value in balance sheets? The par value of preferred stock or common stock is usually unrelated to its market value and price. Sometimes called the nominal value or face value, a stock's par value is the lowest price for which a company or corporation can sell its shares.
Finding the Par Value of Preferred Stock
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Rarely will a company sell shares at the par value; it's used instead as a starting point or point of reference. The writers at Wall Street Prep explain that this is most valuable and relevant for bonds. The easiest way to determine the par value of preferred stock is to find it on the corporation's balance sheet. On an organization's balance sheet, locate the common stock line item. This figure will equal the stock's par value multiplied by the number of shares sold using the par value formula in Excel.
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The common stock line item may state outright what the par value is, or you can easily use a par value equity formula or calculator to figure it out for yourself. Take the institution's total par value and divide that by the overall number of shares issued. The result of that calculation should be a small, even number, such as $1 or even $0.01, which is the par value.
Consider also: How to Calculate Preferred Dividends From the Balance Sheet
How to Calculate Par Value
If you need to calculate the par value differently, you can figure it out using a common stock calculator. First, the experts at Nasdaq recommend gathering the necessary information and figures. You'll need to work with the equity section of the balance sheet since par value represents legal capital. Once again, start by looking for the common stock line item. Look for the "Common Stock" line item discussed above in that section. Publicly traded companies must include their individual stocks' par value in that section somewhere, so read through until you find it.
Look for the total number of shares issued, and don't be alarmed if this figure is enormous. IPOs, also known as initial public offerings, are when an organization first goes public by selling shares on some kind of stock market, usually including 10,000 shares. That number can balloon quickly if the IPO is successful, and large corporations often have shares in billions. If you want to figure out the par value of a whole organization, all you need to do is multiply the par value per share by the total number of shares issued by the company. That figure is the overall par value of the organization.
Consider also: How to Calculate the Total Value of a Company
How Is Par Value Determined?
In some ways, par value may seem irrelevant, and it isn't set using a scientific formula. Instead, the board of directors meets and determines the organization's par value before the IPO. This figure is then stated on the stock certificate. This board of directors usually sets par values as low as possible, sometimes as low as $0.01. This value is generally chosen because a higher par value could create debt or liability if the actual value of the stocks falls below par.
Again, par value isn't as crucial for regular stocks, but it is critical for preferred stocks and bonds. In the case of bonds, experts use the par value to determine the principal owed on the date of maturity. That being said, bonds aren't always issued at par value. They can be issued as discount bonds below par value or premium bonds above the par value. Interest rates typically determine whether a bond is sold at par or a discount or a premium.
Consider also: What Is the Face Value of a Bond?