Classification Of Common Stock - Par Value And Stated Value

Classified Stock

Some companies issue different classes of stocks, and thus, are said to have a complex capital structure, or a multiple capital structure, which generally differ by voting privileges. This is most often done so that the founders of a company can retain control of their company by retaining the class of stock with the greatest number of voting rights. Most often, these different classes are referred to as Class A and Class B stock; however, which one has the greater voting rights may differ. For instance, Google has 2 classes of stock. Class B gives the holder 10 votes per share compared to the 1 vote for Class A. The 2 founders of Google and its CEO at the time of Google's IPO held the Class B shares while selling the Class A shares in a Dutch auction. Berkshire Hathaway issued a Class B stock that sold for far less than the Class A stock, which is currently above $100,000 per share, so that smaller investors could purchase some shares.

The different stock classes may also differ in dividends or liquidation priority. The share classes are defined in the corporate charter and bylaws.

Classification of Common Stock

Authorized shares are the shares that have been authorized by the charter when the corporation was formed. Issued shares are authorized stock that has been sold to investors. Issued shares and unissued shares make up all authorized stock. Outstanding stock is stock that is owned by investors. All outstanding stock has been issued, but sometimes a company will buy back its own stock, which then becomes treasury stock, which reduces the number of outstanding shares.

Authorized Shares = Issued Shares (sold to investors) + Unissued Shares
Issued Shares = Outstanding Stock (held by investors) + Treasury Stock (stock bought back by company)

Treasury stock is stock that had been issued by the company, but was bought back by the company. Treasury stock has no voting rights, does not receive dividends, is not used in the computation of earnings per share, and is no longer outstanding stock. Companies buy back their stock for any of the following reasons:

• to increase the market value of each share by limiting supply;

• to provide stock options and bonuses for officers and employees of the company;

• to have additional shares for the acquisition of another company;

• or to prevent a takeover by another company.

Par Value, Stated Value, Legal Capital

Par value is the value assigned to a share of stock when it is authorized, and is much less than its expected market value. Sometimes a stock will not have a par value, but will have a stated value in the corporation's financial records. Par and stated values set the minimum requirement for legal capital, which is the number of shares of outstanding stock multiplied by the par or stated value of each share. A corporation cannot pay dividends or buy back its stock, if doing so reduces the amount of legal capital below the minimum required by state law. Par value is more, however, for preferred stock, because they pay a fixed dividend that is a set percentage of the par value.

Why do Stocks have Par Value or Stated Value, and why is this less than the Market Price?

When a company first becomes incorporated, the state of incorporation must approve the number of shares of stock that the corporation is authorized to sell—authorized stock, or capital stock. Many states require that the stocks also have a par value, or nominal value, to provide a minimum amount of legal capital to pay creditors. The legal capital is equal to the par value multiplied by the number of shares of outstanding stock, which is the number of shares currently held by investors. The corporation is not legally permitted to pay dividends or buy back its own stock, if doing so reduces the amount of legal capital below the required minimum. The par value is printed on each stock certificate. The par value of each stock is also changed accordingly by stock splits. A 2-for-1 split, for instance, would halve the par value.

The par value is often $1 or less, which is much less than the market price or the expected market price of the stock. The par value is set low, because the stock cannot be issued for less than par value. If par value were higher and if the demand for the stock was less than anticipated, the corporation would be unable to sell the number of shares that it planned, since it would not be able to lower its price below par value in order to increase demand for its stock.

The par value of preferred stock is much higher than common stock because preferred stock pays a fixed dividend that is a designated percentage of par value.

No-par stocks have no par value printed on its certificates. Instead of par value, some states allow no-par stocks to have a stated value, set by the board of directors of the corporation, which serves the same purpose as par value in setting the minimum legal capital that the corporation must have after paying any dividends or buying back its stock.

If a corporation's stock has neither par value nor stated value, then the legal capital required is equal to the total amount received when the stock was first issued.