Series 7: 1.2.3 Par Value Of Common Stock

Taken from our Series 7 Top-off Online Guide

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1.2.3  Par Value of Common Stock

Historically, par value was the price at which a company initially sold its shares. The concept of par value was much more important in the unregulated equity markets of the past than in the regulated markets of today. Today companies may set par values at $0.001 per share or even lower. Some states allow companies to issue shares with a zero par value. In general, today par value is an accounting artifact with little relevance for the investor and virtually no influence on the price of a stock.

For accounting purposes, par value multiplied by the number of shares of outstanding stock equals legal capital. The difference between a stock’s issue price and its par value is called paid-in surplus and is recorded on the balance sheet as additional paid-in capital. Together, legal capital and additional paid-in capital equal the total investment by the company’s owners.

Stockholder’s Equity, also called owner’s equity, is made up of two main parts, retained earnings and contributed capital. Contributed capital can also be called paid in capital. Retained earnings can be found by taking assets minus liabilities minus paid in capital. Contributed capital is made up of two sources legal capital and additional paid-in capital. Legal capital is the par value of the outstanding stock. Additional paid-in capital is the value of the stock in excess of legal capital, the value of property acquired from donations, and the value of the company’s treasury stock.

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