What is Par Value of Shares?

Par value, in the world of finance and investing, refers to a nominal or face value assigned to bonds, stocks, or currency. While it might hold different significance depending on the type of security it's associated with, we'll focus on its meaning and relevance in the stock market, particularly with shares.

Understanding Par Value of Shares

In the context of shares, par value is essentially a nominal value assigned to a stock by the issuing company. It's important to note that par value has little to do with the actual market value of the stock. Instead, it's a legal and accounting creation designed for various reasons, including legal protection and accounting integrity.

Calculating Par Value

The par value of a share is determined at the time the stock is issued by the company and is recorded in the company's articles of incorporation. For example, a company might issue 10 million shares with a par value of ₹1 per share.

Purpose of Par Value

• Legal Obligations: Initially, par value had legal implications, particularly regarding the minimum price a stock could be sold for upon initial offering to protect creditors.
• Accounting: It helps in the accounting process by creating a baseline figure for issuing shares in company books.

Par Value vs. Market Value

• Par Value: It is a static number, determined by the company at the time of issue and typically set at a minimal amount.
• Market Value: This is the current price at which a stock is traded on the stock market, influenced by factors such as company performance, investor sentiment, and market trends.

Example in Context

Let’s say Infosys Limited decides to issue shares with a par value of ₹5. Even if Infosys’ shares trade at ₹1,500 on the stock market, the par value remains at ₹5. This discrepancy shows how par value is mostly irrelevant to investors, focusing instead on market value for trading purposes.

No Par Value Stocks

Some companies issue shares with no par value to avoid the legal ramifications of issuing shares below par and to simplify the accounting process. This has become a more common practice as the significance of par value has diminished over time.

Conclusion

While the concept of par value can seem outdated, especially when considering the dynamic nature of the stock market, it continues to play a role in the legal and accounting frameworks of companies. As an investor, however, your focus should be more on the market value of shares, as it reflects the current worth and potential of your investments. Understanding the difference between par value and market value is crucial for grasping the fundamentals of stock market investing.