What does the term 'par value of stock' refer to?

The term 'par value of stock' refers to an arbitrary amount assigned to a share of stock. This is essentially a nominal value that is recorded on the stock certificate and in the company’s accounting records. While it does not necessarily reflect the market value of the stock—since stocks can trade much higher or lower than their par value—the par value is primarily a legal and accounting concept.

For example, if a company issues shares with a par value of $1, this means that the company has set a baseline value for each share. This value is often required for legal purposes and serves as a reference point that can impact the company’s balance sheet. It is important to note that par value does not affect the actual market price of the stock, which is determined by supply and demand in the marketplace.

This distinction makes it clear that par value is a concept rooted in corporate governance and accounting practices rather than a reflection of the stock's trading value or an assessment of the company’s overall worth.