The par value of a stock is originally set by corporations with contributions by their investment bankers at the initial public offering (the first time a specific stock is sold to investors as a company raises money) — often just called the IPO. The investment bankers determine the value of the company, which is used to establish the amount to be raised, and then divide that amount by the total number of shares to get the par value. During the IPO, shares are sold at no less than the par value, but investors often pay more as they try to outbid other investors. Any amount that the company raises over par value contributes to the additional paid-in capital and shows up on the balance sheet as such.

When a company earns income, that is to say when it makes money, that money either goes to the owner(s) of the company or is reinvested in the company. In either case, the money belongs to the company’s owner(s) and must contribute to the value of their ownership in the company. For corporations, any money that doesn’t go to the stockholders in the form of dividends (which are reported on the income statement; see ssss1) is reinvested in the value of the company as retained earnings. Retained earnings consist of the money that a company makes after all expenses that it reinvests instead of giving to the stockholders.