No Par Value: Everything You Need to Know
No-par value stock is issued without considering a company's specified face value as outlined in the Articles of Incorporation or stock certificate.3 min read
2. Low-Par vs. No-Par Value Stock
3. Why Would Stocks Have no Par Values?
No-par value stock is issued without considering a company's specified face value as outlined in the Articles of Incorporation or stock certificate. Instead, no-par value (or face value) stock prices are based on the amount investors want to pay for open-market stocks.
What is No-Par Value Stock?
Most stock shares are either classified as low-par or no-par value. A no-par value stock's price is determined by supply and demand, which naturally fluctuates according to market conditions. When companies have no-par value stock, this means that the stock price is allowed to experience natural variations.
Many companies find it best to issue no-par value stock because they have more flexibility to set higher prices in the future, which means less shareholder liability if the stock prices drop dramatically. Investors usually do not consider a stock's written face value (par) before purchasing an investment because prices fluctuate with the stock market.
What's more, stock production with a face value may lead to legal liabilities when considering a stock's going rate and assigned par value, making these stocks a less viable option for investors.
Low-Par vs. No-Par Value Stock
Low-par value stocks may show a lower amount than $0.01 or no greater than a few dollars. No-par value stocks have no face value at the time of printing. Small companies often choose to issue stocks with $1 face values when they have a low number of shareholders. The benefit to issuing small stock amounts is that they can function as line items for accounting purposes.
There are certain risks associated with a low-par value stock. For example, if a company releases low-par value stock of $5 per share and sells 1,000 shares, the company can list its associated book value at $5,000. This value may not matter if the company does well, but if it collapses or owes creditors, the business might be required to review accounting statements, at which point it would be obvious that business failed to fully capitalize. At this point, the company might require shareholders to help pay the business debts.
No-par value stock doesn't have these risks. Since there's no minimum baseline value for pricing the stock, the price is based on each investor's perceived value of the stock. Perceived value can be based on numerous factors, including:
- Industry competitiveness
- Technology changes
After selling no-par value stock, the company can debit the cash received and credit the common stock account. It can also credit an additional paid-in capital account based on the amount paid by investors in excess of the stock's par value.
Most states allow no-par value stock, which has essentially eliminated the need to even have par values.
Why Would Stocks Have no Par Values?
The term “par value” has different meanings depending on whether you're talking about debt or equity, which can confuse people trying to understand how it relates to stock. Basically, par value refers to the amount at which a stock, bond, or other security is issued or can be redeemed. Par value is also known as:
- Nominal value
- Face value
Corporations issue stocks with no par value because it helps them avoid liability issues. If the stock prices take a turn for the worse, they could be liable to stockholders unless the company issues no-par value stock.
For example, if the company issued stock that traded at $5 per share but the stock's par value was $10, then the company would theoretically be liable for $5 per share.
Par values have no relation to the stock market's value. In fact, a no-par value stock can trade for hundreds of dollars depending on how investors view the stock and the market itself.
A stock's par value should be stated in the company's character or Articles of Incorporation. Since companies sell stock as a way of obtaining capital, the par value should be multiplied by the total number of issued shares. This is the minimum amount of capital the stocks will generate if all shares are sold.
Keep in mind, however, that a stock's par value represents a binding contract between the shareholder and the company. If the business can't meet its financial obligations, creditors can require shareholders to pay the difference.
If your company needs help issuing no-par value stock, post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.