Does the Par Value Dictate the Asking Price for the Company's Stock?
- The “par value” of a stock has no practical meaning in today's stock markets. Its continued existence is based on old laws that hold all stocks must be imprinted — that is, on the certificate itself — with their “face value.” Often, this “face value” is as low as $.001. These laws mandate that the “face value” is that value below which the firm can not redeem a stock. In other words, under no circumstances can the firm redeem a share of stock for less than the “face value” price. Since the “face value” price is often so low, and is a bit of a parody, the laws have no contemporary meaning.
- An “asking price” is just the price. It can come from two sources: the market itself, or the firm when it issues its initial public offering of the stock. In neither of these two cases does the “par value” have any relevance or even meaning. Therefore, not only does the “par value” not dictate the asking price, the “par value” itself has no economic meaning. It dictates nothing because it is nothing of substance, only of convention.
- Share worth does have a close relation to asking prices and it is possible that novice investors will confuse par with share values. The “worth” of a share of stock — which simply is a piece of a firm — can be based on the firm's production or performance, but it can also be based on the market's demand for the stock, which might be high regardless of the firm's performance. These measures are the main “meanings” of stock market transactions. The “par value” has no purpose but to satisfy very old state and federal laws.
- Nothing determines the “par value.” There is no legal requirement as to how that value is chosen. It is arbitrary and is a mere number on a piece of paper. Therefore, firms usually peg it at an absurdly low rate. When the term “par value” is mentioned in relation to a bond, this concept has immense value, because it is the about of money the bondholder must be paid at the bond's maturity. Hence, the phrase is almost never used when dealing with stocks, but is constantly used when dealing with bonds.