No PAR Stock: Everything You Need to Know
No par stock is stock that has been issued without a value listed on the face of the stock certificate. Many people often wonder if it makes a difference whether or not the value is stated directly on the stock. 3 min read
No par stock is stock that has been issued without a value listed on the face of the stock certificate. Many people often wonder if it makes a difference whether or not the value is stated directly on the stock. In many states, there are rules created to protect shareholders so that the board of directors of a company does not issue too much stock, thus depreciating the value of the shareholder's investment. This is referred to as a minimum legal capital law, which requires that a corporation maintain a minimum amount of assets at all times.
This will help protect the stock value for investors during years in which the business may be unprofitable by maintaining a certain level of assets. These minimum capital requirements are often based on a par value that has been set up during the drafting of the corporate charter.
Many people can become confused when discussing the par value of stock due to the fact that the meaning may be different depending on whether you are referring to equity or debt.
Explaining Par Value
Par value used to be the price that the company had originally valued their shares when they were first sold. This becomes a theoretical liability from the company to the shareholders because if the market value of the stock drops below what the par value was indicated, the company would be liable for the value of the difference. This is because par value is the nominal value at which the stock can be redeemed.
For example, if a bond was issued at a par value of $500, once it matures, it could be redeemed for $1,000. This is extremely important for fixed-income securities such as bonds where the interest payment on preferred shares is based on a percentage of the par. For example, an 8 percent bond with a par value of $500 would gain the investor $0 in interest.
In stock issuance today, most stocks are now issued with a significantly low par value such as $0.01 per share or listed as no par value at all, to prevent the theoretical liability a company could incur.
Why Issue No Par Stock?
You may find yourself wondering why a company would issue stock with no par value or why a shareholder would accept it. There are many reasons for a business to issue no par stock such as:
- The par value has nothing to do with the value the stock has in the market.
- A no par stock can still trade for hundreds of thousands of dollars.
- It gives a company the flexibility to set higher future stock prices.
- There is less liability to the shareholders if the stock was to fall drastically.
- It allows the price of the stock to experience the natural variations.
- It protects stock from being misrepresented in value.
- It allows the price to be determined by the value that investors are willing to pay. This can be determined by cash flow, competition, and changes in technology.
Often, the decision to issue no par value stock is indicated in the company's Articles of Incorporation or indicated on the stock certificate itself. The stock will be issued as either no par value or low par value. While the stock may be issued with no set value, the value that they will trade for on the open market will be determined by what the investors are willing to pay for shares in that company.
Since pricing fluctuates with the market, an investor is often not concerned with the face value amount of the stock but what it is worth currently on the market. Sometimes having a par value listed on the stock that is significantly different than it trades on the market may make it a less attractive option for those issuing the stock.
With the high benefits of issuing no par stock, state governments are becoming more accepting of no par stock trends. The acceptance of no par stock issuance with companies, as well as government agencies, is making it a more common practice and is beginning to eliminate the necessity of having par value stock. It is important to note that the use of no par stock is not accepted with types of securities, such as bonds, as the par value is the same as the face value of the instrument.
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