Definition: Par value is dollar amount assigned to each share of stock in the corporate charter when the corporation is formed. In other words, when incorporation papers are made, a par value is assigned saying the company stock is worth at least this much per share.
Some companies set their par value at $1 while other set their stocks’ par value at $10. There is no limit as to how high or low the stock par value has to be. The par value is usually set at a low price to encourage investors.
What Does Par Value Mean?
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Many states have laws that recognize the par value as a minimum legal capital. This is the lowest amount someone can pay for the stock. If someone pays a price under the minimum legal capital, they will owe the company the difference at a future date.
Example
For instance, if Bob paid $100 for 20 $10 par shares of stock, he would have to pay the other $100 at a future date. Essentially, the company would “loan” him the difference. He would have to repay that loan eventually. Most states make these laws to protect creditors from thinly financed corporations. Remember, shareholders of a corporation have limited liability. The corporation’s creditors can’t come after the shareholders for the corporate debts.
If Bob is forced to pay the full par value of the stock, the corporation will have more money to pay off its creditors and the creditors will be able to demand payment from the corporation.
