What's the par value of a stock good for?

Question

What's the par value of a stock good for? If you buy a stock for $50 per share and the certificate says something like "par value .1 cent" what good is that?

Answer 1

I have a definition of "par value" for you.  In short, it is the initial value given to a stock, and may not have any bearing on the market price or long term value.  An exception to the general picture would lie in preferred stock.  It is needless to say that the value of a stock can change significantly either way from the time that it first goes on the market.

If you read the definition you can figure it out for yourself.

par value

Definition

The nominal dollar amount assigned to a security by the issuer. For an equity security, par value is usually a very small amount that bears no relationship to its market price, except for preferred stock, in which case par value is used to calculate dividend payments. For a debt security, par value is the amount repaid to the investor when the bond matures (usually, corporate bonds have a par value of $1000, municipal bonds $5000, and federal bonds $10,000). In the secondary market, a bond's price fluctuates with interest rates. If interest rates are higher than the coupon rate on a bond, the bond will be sold below par value (at a "discount"). If interest rates have fallen, the price will be sold above par value. also called face value or par.

Answer 2

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Answer 3

Its a somewhat arbitrary value.  Some states require a par value for stock. For common stock if stock is issued above par than it is said to be issued at a premium.  If it is issued at below par it is said to be issued at a discount.  And therein lies the problem for shareholders.  Issuing stock below par value creates an exception to the limited liability rule of a corporation, and a contingent liability for shareholders.  Investors who bought stock below par become liable to the corporation for the par value and the price they paid.  This becomes an issue if the corporation incurs losses in excess of assets and retained earnings.  Shareholders become liable for the difference in what they paid for the stock and par value, if they bought the stock below par.  Par value has become less relevant with regulation and market liquidity and transparency.  For states that still require a par value on common stock the par value is set at an extremely low amount, like one cent.  Basically it doesnt mean much anymore for common stockholders.

Preferred stock and fixed income securities are issued at or near par and dividends and interest are paid as a percentage of par.