Does the Par Value Dictate the Asking Price for the Company's Stock?
The par value of a company's stock -- if the stock even has a par value -- has next to no relationship to the asking price for that stock. Par value gets set when the company first incorporates, and the figure the company chooses is of interest primarily to its founders and accountants. What matters to everyone else is the market's supply of and demand for the stock.
The concept of stock par value is something of a historical relic -- a holdover from early state laws intended to protect investors from having the value of their stock sharply reduced by companies dumping shares onto the market at a discount. Strictly speaking, a stock's par value is the minimum price that a corporation can charge for a share of stock. (You could think of it as the "face value" of the stock, or perhaps as the value of "the paper the stock certificate is printed on.") Company founders pay par value for their stock when they incorporate. If you're not a company founder, though, par value has no effect on the price you'd pay for shares.
Setting Par Value
Modern corporations set their stocks' par value extremely low. When the social networking giant Facebook went public in 2012, for example, it set par value at $0.000006 per share. At that price, company founders could get themselves 1 million shares for $6. Many states now allow corporations to sell stock with no declared par value. Par value persists, though, because of the way some states assess franchise taxes on the companies incorporated there. Such states include Delaware, where most major U.S. corporations are chartered.
When a company prepares to start selling its shares to the public, it doesn't look to the par value for guidance. Par value is meaningless at this point. Instead, it works with an investment bank to gauge investor interest in the stock. The initial asking price for the stock depends on the demand in the market. The higher the expected demand, the higher the company will set its initial price. If the company couldn't get more from the public than par value -- a fraction of a cent per share, in most cases -- then it wouldn't bother selling shares.
Once the company sells a share into the open market, where it can change hands from one investor to another, then par value really loses all meaning whatsoever. The asking price for the stock will be whatever the seller thinks he can get for it. Considering how tiny most par values are, that asking price will likely be far above par. However, the asking price can be lower than par value, since only the company is bound by the requirement to sell shares for no less than par. General Electric once had a par value of $5 a share, but a series of stock splits had reduced that to 6 cents by 2012. Plenty of stocks trade for less than that. If the bottom were to drop out of GE's business and the market price of its stock fell to, say, 3 cents a share, then that's what you'd pay on the open market. If you bought from GE, however, it couldn't sell you a share for less than 6 cents.
- Financial Accounting for MBAs, Fourth Edition; Peter Easton, et al
- CapGenius: Set the Par Value for your Common Stock "Absurdly" Low
- Facebook: 2012 Third Quarter 10-Q
- General Electric: Certification of Incorporation
Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.