More of this Feature • Part 1: Lesson 3 Main • Part 2: How to Get Statements • Part 3: What's a Balance Sheet • Part 4: Typical Balance Sheet • Part 5: Current Assets • Part 6: Receivables • Part 7: Receivable Turns • Part 8: Inventory • Part 9: Inventory Turns • Part 10: Inventory Example • Part 11: Prepaid Expenses • Part 12: Current Liabilities • Part 13: Working Capital • Part 14: WC Per Dollar of Sales • Part 15: Negative Work. Cap • Part 16: Current Ratio • Part 17: Quick Ratio • Part 18: Long Term Investment • Part 19: Property, Plant, Equip. • Part 20: Intangible Assets • Part 21: Goodwill • Part 22: Deferred Charges • Part 23: Debt, Debt to Equity • Part 24: Other Liabilities • Part 25: Minority Interest • Part 26: Shareholder Equity • Part 27: Book Value • Part 28: Com. & Pref. Shares • Part 29: Cap. Surplus, Reserve • Part 30: Treasury Stock • Part 31: Retained Earnings • Part 32: Formula & Calculations • Part 33: Putting it all Together • Part 34: Segment 2

Join the Discussion "My employer gives me the option of having money taken out of my paycheck and putting it in an investment.  Is this a good idea?" Read More...

Related Resources • Investing Lesson 1 • Investing Lesson 2 • Investing Lesson 3 • More Investing Lessons

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Common, Preferred, and Convertible Shares

You'll normally see an entry for such things as "common" or "preferred" stock on the balance sheet under the shareholder's equity section of a balance sheet.  This does not refer to the current price of all of the company's shares.  Instead, these entries reflect the par value of the company's stock, and / or, when there is no par value assigned to the stock, the amount investors paid when the company issued shares. 

What is par value?  Par was originally created as a way to protect creditors and shareholders by providing a "cushion" of assets that could not be damaged or impaired.  In time, it proved to be completely unsuccessful at protecting either party.  This is important because companies would take the total shares outstanding, multiply them by the par value, and put them on the balance sheet as "paid in capital".  An example: if a business had 100,000 shares of stock outstanding and each had a par value of $1, the company would put $100,000 under "common stock" on the shareholder equity part of the balance sheet.

Eventually, state governments no longer required companies to establish a par value on their stock.  In cases where no par exists, a corporation must put the amount raised when the company issued stock.  If the same business had 100,000 shares and no par, but it initially sold stock at $25 per share, it would put $2,500,000 under the common stock section of shareholder equity on the balance sheet.

On most balance sheets, there is a list of such entries.  They consist of all of the capital that has been paid in by shareholders who have purchased either the common stock, preferred stock, warrants, etc.

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