Updated July 12, 2023
Definition of Par Value of Stock
The par value of the stock, also known as face value, is the stock’s minimum value, which is determined by the issuing company as stated in the Corporate charter or the company’s legal papers.
In other words, it is the stock’s minimum price 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.
Explanation
The value of the stock is 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 records of the organization or the corporate certificates of the organization. Also, this is the minimum value of the company’s stock 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 change in case of a share split by the company. Every investor must know the value of the company’s stock 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 the stock and the market value of the company’s stock. 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 the Par Value of Stock?
The value of the stock is determined as follows:
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?
Solution:
The par value of a stock calculates as follows:
Par Value = Par Value per Share * No. of Shares Issued
- Par value of stock = $10 * 8489
- Par value of stock = $84890
Accordingly,
| Par value per share | $10 |
| No. of shares issued | 8489 |
| The par value of stock | $84,890 |
Accounting for the Par Value of Stock
For booking the Par value stock in our books of accounts, the following journal entry passe:
|
Date |
Particulars | Debit |
Credit |
| 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 the 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 stock’s market value 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 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 stock’s market value is always greater than the value of the stock.
- The process of a share split affects the value of the stock, whereas the process of a share split does not affect the stock’s market value.
Advantages
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 stock’s value cannot fall, and if the value goes down, the company will be liable to its creditors. Hence, generally, it is kept at a low value to avoid contingent liability.
Conclusion
The 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 stock’s market value. The investor or shareholder needs 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, smooth investment in the company, and decision-making. Also, the advantages and disadvantages of the value of the company’s sock should be studied and considered by the shareholder or investor while making any new investment in the company.
Recommended Articles
This is a guide to the Par Value of Stock. Here we discuss the definition and how to determine the stock’s par value. Along with examples and advantages. You may also have a look at the following articles to learn more –
