Why would a stock have no par value?

By Investopedia Staff AAA
A:

People often get confused when they read about the "par value" for a stock. One reason for this is that the term has slightly different applications depending on whether you are talking about equity or debt.

In general, par value (also known as par, nominal value or face value) refers to the amount at which a security is issued or can be redeemed. For example, a bond with a par value of $1,000 can be redeemed at maturity for $1,000. This is also important for fixed-income securities such as bonds or preferred shares because interest payments are based on a percentage of par. So, an 8% bond with a par value of $1,000 would pay $80 of interest in a year.

It used to be that the par value of common stock was equal to the amount invested (as with fixed-income securities). However, today most stocks are issued with either a very low par value (such as $0.01 per share) or no par value at all.

You might be asking yourself why a company would issue shares with no par value. Corporations do this because it helps them avoid a liability to stockholders should the stock price take a turn for the worse. For example, if a stock was trading at $5 per share and the par value on the stock was $10, theoretically, the company would have a $5-per-share liability.

Par value has no relation to the market value of a stock. A no par value stock can still trade for tens or hundreds of dollars - it all depends on what the market feels the company is worth.

For more about par values, see Bond Basics Tutorial and Stock Basics Tutorial.

RELATED FAQS

  1. What is the difference between preferred stock and common stock?

    Preferred and common stocks are different in two key aspects. First, preferred stockholders have a greater claim to a company's ...
  2. Why do some preferred stocks have a higher yield than common stocks?

    Before we answer this question, let's just take a quick review of what a stock's yield is actually measuring.The yield is ...
  3. How does Warren Buffett choose the companies he buys?

    Investors have long praised Warren Buffett’s ability to pick great companies to invest in. Lauded for consistently following ...
  4. Which investment would be most suitable for a client investing for retirement and ...

    Which investment would be most suitable for a client investing for retirement and seeking protection from purchasing power ...
RELATED TERMS
  1. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders ...
  2. Cash Flow-to-Debt Ratio

    A ratio of a company’s cash flow from operations to its total ...
  3. P/E 10 Ratio

    A valuation measure, generally applied to broad equity indices, ...
  4. Equity Financing

    The act of raising money for company activities by selling common ...
  5. Purple Chip Stock

    A term coined by portfolio manager John Schwinghamer to describe ...
  6. Current Dividend Preference

    A safety feature of preferred shares, whereby holders of such ...
comments powered by Disqus
Related Articles
  1. The Education of Warren Buffett
    Investing Basics

    The Education of Warren Buffett

  2. What You Need To Know About Preferred ...
    Trading Strategies

    What You Need To Know About Preferred ...

  3. Investor, Know Thyself: Choose A Stock ...
    Investing Basics

    Investor, Know Thyself: Choose A Stock ...

  4. Goodwill vs Other Intangible Assets: ...
    Investing Basics

    Goodwill vs Other Intangible Assets: ...

  5. Valuing Firms Using Present Value Of ...
    Fundamental Analysis

    Valuing Firms Using Present Value Of ...

Trading Center