The Definition of Par Value
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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This page is part of Investing Lesson 3 - Understanding the Balance Sheet. To go back to the beginning, see the Table of Contents. If you have already read this lesson, you can skip directly to the Balance Sheet Quiz.
