The share price of a company’s stock may differ based on various factors. Usually, market participants and forces decide how much this stock is worth. However, some internal factors may also play a role in establishing the price that shareholders will pay for it. When companies issue shares to the general public, they can decide how much they will charge.
Once these shares get into the market, the market forces will determine the price. Any subsequent transfers of stock will have a different worth compared to the initial issue price. However, the underlying company does not receive any compensation for it. The only amount that companies get is the initial payment they receive from shareholders. Any subsequent exchanges happen between holders only.
The price that the market deems suitable for a company’s shares is known as the market price. This price can be highly critical in determining the stock’s worth. However, companies may also have a par value for their shares. This par value is highly crucial for accounting purposes. Companies can fix this price without market intervention. Before understanding how to set the par value of shares, it is crucial to know what it is.
What is the Par Value of Shares?
The par value of a share, also known as the nominal value, is the price set for shares. This price is not the amount that the company will charge its shareholders for share issues. However, it determines the minimum value for the company’s stock. In some cases, companies may also distribute their shares below the par value or without any charge.
The par value of stocks is the price that guarantees investors of the issuing company’s share value. For most shareholders, it assures that the stock’s value won’t fall below this amount. Even if the market determines the share’s worth to be lower than its par value, the company will value it at nominal value. Usually, companies set this amount at minimal amounts, for example, $0.01.
The par value also sets a limit below which companies cannot charge for the issue of shares. In other words, companies cannot sell their shares below this value. Usually, laws and regulations require companies to set a par value to determine the minimum issue price. Therefore, most companies select a minimal amount to set the par value of their shares.
For stocks or shares, the par value has little significance. While it establishes the minimum amount that companies must charge, it is not crucial in some jurisdictions. Some states may allow companies to issue shares with no par value. This allowance has waned the significance of par value for companies. However, it is highly significant for the accounting of shares.
Overall, par value is the amount that companies set for their shares. This value sets the minimum amount that companies must charge for their shares. However, it does not dictate the market value of those shares. Instead, it is a legal and accounting concept that some jurisdictions may require companies to follow. Therefore, it is not substantial but rather something that may fall under legal requirements.
How to set the Par Value of Shares?
Companies set the par value of their shares in the corporate charter, also known as the articles of incorporation. In some jurisdictions, it may also be called the articles of association. It is a written document filed with the registrar or Secretary of State by the company’s founders. This document details the significant components of a company, for example, objectives, structure, operations, etc.
As mentioned above, in some jurisdictions, companies must set this amount under the law. However, some states or jurisdictions may also remove this requirement. On top of that, the stock market rules may also require companies to set a par value for their shares. More importantly, for initial public offerings, establishing the par value of shares is highly crucial.
When companies go through an initial public offering, they must set the par value of their shares. Usually, the agreed a company’s objectives in three areas. The first includes the initial capitalization target set for the process. Similarly, the second contains the number of public shares that the company offers. It must also consist of the ownership position of the initial offers.
The last area includes the prediction of share price changes after the company shares them in the market. All of these factors play a crucial role in setting the par value of shares. Through these, companies can achieve an optimal first day of trading. This way, the par value does not go against the expectations of market players, analysts, and new investors.
Overall, the par value of shares is a part of the articles of association that companies formulate at incorporation. In some cases, setting this value is mandatory per laws and regulations. More importantly, for companies going through an initial public offering, the par value of shares can be highly critical. Companies must consider various factors when establishing this amount.
What is No-Par Value Stock?
As mentioned above, in some jurisdictions, companies must set a par value for their shares. However, in other places, this requirement may not apply. For companies operating in those areas, the no-par value stock may be an option. In essence, the no-par value stock refers to shares that do not have a par or face value.
A no-par value stock is any share that a company issues without having a par value. Therefore, the underlying company does not mention any amount for this value in its articles of association. On top of that, the stock certificates that companies issue for these shares do not contain a par value. Instead, the certificate mentions “no par value”. Through this process, companies can issue shares without worrying about the minimum worth.
No-par value stocks provide companies with several benefits. One of these includes the flexibility to set higher prices for future public offerings. This way, shareholders have to bear lower downside risk if the company’s stock price falls significantly in the future. Even for companies that have a par value stock, this value is not crucial for investors.
What are the importance and limitations of Par Value of Shares?
The par value of shares is a highly crucial concept for companies. For most small business owners, this term is vital to understand before incorporation. This value also provides a benchmark that the stock price cannot go below this price. For investors, it assures their investment in the company’s stock.
Historically, the par value of shares provided a benchmark for the price of the stock. If it falls below this price, the shareholders become liable for the difference between them. It also safeguards investors’ interests by ensuring that no one gets favorable treatment with lower prices for shares.
However, the par value of shares is a notional number that does not reveal the market price. This value does not impact stock holding or the market price of the stock. Similarly, this value is more crucial to bonds than shares. In some instances, it may not be mandatory for companies to set the par value of shares. Therefore, it is not highly significant.
Par value is the minimum price that companies must charge for their shares. Laws and regulations require companies to set this amount in the articles of incorporation. However, it may not be mandatory to do so in some jurisdictions. For those jurisdictions, companies may also use the no-par value shares. The par value of a stock can be a highly critical concept, although it has some limitations.