Par Value of Shares

Every share has what is called the par value of the share. The par value is an amount determined by the company issuing the shares. The meaning of “par value” for common stock is different from its meaning for preferred stock and different from its meaning for bonds.

For common stock, par value is usually a very small amount per share.

The par value of common stock is usually a small amount because it represents the company’s legal capital. A company’s legal capital is the amount of money that may not be distributed as dividends. Any amount that is received by the company for the sale of shares in excess of the par value can be distributed by the company.

The par value of common stock is also the maximum amount of personal liability that a shareholder, as owner, has in the case of liquidation if the assets of the company are not sufficient to cover the liabilities.

The par value of a share of common stock has nothing to do with the price the share was originally sold for by the company. When the stock is originally sold, the par value of the shares is credited to the company’s Common Stock account in the equity section of the balance sheet. The additional amount received by the company for each share when originally sold is credited to the company’s Additional Paid-In Capital–Common Stock account in the equity section of the balance sheet.

For preferred shares, the par value is used to calculate the dividend to be received by the preferred shareholder. The par value of preferred shares is discussed in detail in the material about preferred shares.