Definition of Par Value of Stock
Par value of the stock which is also known as face value is the minimum value of the stock which is determined by the issuing company as stated in the Corporate charter or in legal papers of the company in other words it is the minimum price of the stock at which the issuing company promises to issue the share which remains fixed or unchanged or unaffected by market conditions and the value of which is listed on the stock market.
The value of the stock is also known as the face value and nominal value of a stock. It is mandatory by law for many companies to state the value of their stocks in their legal documents. Hence, the value of the stock is written in the operating documents of the organization, or in the corporate certificates of the organization. Also, this is the minimum value of the stock of the company on which value the company issues the stock. It does not get changed due to any capital market fluctuation, external demands, or any other reasons. However, the value of the stock can be changed in case of a share split by the company. Every investor must have knowledge of the value of the stock of the company in order to have the correct and clear picture of the company. The value of the stock is also listed on the stock exchange. The investor often gets confused between the value of stock and the market value of the stock of the company. However, the value of a stock is not similar to the market value of the stock. There are a lot of differences between the value of stock and the market value of the stock.
How to Determine Par Value of Stock?
The value of the stock is determined as follows:
Par Value of Stock = Par Value per Share * Number of Shares Issued
so, we have to determine the value per share first and the number of shares issued to calculate the value of stock
Example of Par Value of Stock
Let’s take the example of company XYZ ltd. The total number of shares issued by the company is till date is 8,489 where the value per share is $10. What is the total value of the stock of the company?
Par value of a stock is calculated as:
Par Value = Par Value per Share * No. of Shares Issued
- Par value of stock = $10 * 8489
- Par value of stock = $84890
|Par value per share||$10|
|No. of shares issued||8489|
|Par value of stock||$84,890|
Accounting for Par Value of Stock
For booking the Par value stock in our books of accounts, the following journal entry is passed:
|Cash/Other items received Dr||$|
|To common stock/Preferred stock A/c||$|
|To Paid in Capital in Excess of value, Common/Preferred Stock|
|(Entry to record issue of stock in the company)|
Note: In the above journal entry, the formulae are as follows,
Cash received = (Share issued * Price per share)
Other items received = Market value of the item received
Common/Preferred Stock = (Shares issued * PAR Value)
Paid in Capital in excess of value, common preferred stock = (Value received-Par value of the stock)
As per general accounting rules, we have to ensure that our Debits= Our Credits
Difference Between Par Value of Stock and Market Value
Following are some of the differences between the value of stock and market value:
- The value of the stock is its fixed value which remains unchanged throughout whereas the market value of the stock keeps on fluctuating due to many reasons such as stock market conditions, demands, etc.
- The value of a stock is the value at which the stock is listed on the stock exchange whereas the market value of a stock is the value at which the share is bought or sold in the capital market.
- The value of the stock is always less than the market value of the stock of the company whereas the market value of the stock is always greater than the value of the stock.
- The process of a share split has an effect on the value of the stock whereas the process of a share split does not have any effect on the market value of the stock.
The following are the advantages of the value of Stock:
- With the help of the value of the stock, interest on shares and bonds can be calculated easily.
- Also, the value of a stock is used to compute the discounts, premiums, returns, market value, etc. regarding stock
- Before opening any business, Understanding the value of the stock can result in better planning and presentation. It can help in better decision making of the shareholder or investor.
- It marks the set line below which the value of the stock cannot fall down and if the value goes down, the company will be liable to its creditors. Hence, generally, it is kept at a low value in order to avoid contingent liability.
Par value of the stock is different from the market value of the stock. Par values of stock do not have any connection with the market value of the stock. It is very much important for the investor or shareholder to have a clear idea or knowledge or understanding of the value of a stock before going for any new investment in the company. Having a good knowledge of the value of stock induces trade efficiency and smooth investment in the company along with decision making. Also, the advantages and the disadvantages of the value of sock of the company should be studied and taken into consideration by the shareholder or investor while making any new investment in the company
This is a guide to Par Value of Stock. Here we discuss the definition and how to determine the par value of the stock. along with examples and advantages. You may also have a look at the following articles to learn more –