Par value is used to determine the additional paid-in capital.
It used to be required that every stock have a "par" value or, in other words, a value at which the stock was originally introduced. This differs from market value, and the par value is used to determine the additional paid-in capital paid by stockholders.
Stock Market Purposes
When you take the par value of a stock and offer it to the public, the price at which the market buys it is called the "market value." To calculate the additional paid-in capital value, you simply subtract the par value from the market value, and you have the additional paid-in capital value.
Private Stock Purchases
When a company sells shares to investors, the par value remains the same in all cases. As a rule, the shares of that company can never be sold under par value. Any amount over the par value that the investor pays for the shares is referred to as additional paid-in capital value.
Definitions
Contributed capital, or "paid-in capital," is the amount paid by shareholders. Additional paid-in capital, also called "contributed capital in excess of par," is the value determined by subtracting the par value from the contributed capital.
Example
Company A distributes shares at $2 per share, establishing par value. Two years later, it releases shares to the public through an initial public offering (IPO) and sells at $25 per share. The additional paid-in capital is $23.
Exceptions
In the United States, "no par value" stocks are accepted in many states or, if a value is attached, is usually a penny. However, this decision must be made at incorporation. Par value, and thereby additional paid-in capital values, are relevant only to preferred stock, not common stock.
