Par Value Stock vs. No-Par Value Stock: An Overview
A share of stock in a company may have a par value or no-par value. These categories are both pretty much a historical oddity and have no relevance to the stock's price in the market.
The par value, or face value, is the stated value per share. This price was printed on paper stock certificates before they became antiquated for newer electronic versions. If a company did not set a par value, its certificates were issued as no-par value stocks.
Notably, par value for a bond is different, referring to its face value, or full value at maturity.
- A par value for a stock is its per-share value assigned by the company that issues it and is often set at a very low amount such as one cent.
- A no-par stock is issued without any designated minimum value.
- Neither form has any relevance for the stock's actual value in the markets.
- If a company issues no-par stock, they will not have a potential future debt obligation to shareholders should the market price drop below the supposed par value.
- The accounting treatment for the sale of par value stock and no-par value stock is fairly similar, though the transactions use different general ledger accounts.
Par Value Stock
Companies sell stock as a means of generating equity capital. Therefore, the par value multiplied by the total number of shares issued is the minimum amount of capital that will be generated if the company sells all the shares. The par value was printed on the front of the old version, paper stock certificate and is often available in digital form today.
In reality, since companies were required by state law to set a par value on their stock, they choose the smallest possible value, often one cent. This penny price is because the par value of a share of stock constitutes a binding two-way contract between the company and the shareholder.
If shareholders pay less than the par value for a share of stock and the issuing company later becomes unable to meet its financial obligations, its creditors can sue shareholders for the difference between the purchase price and the par value to recoup the unpaid debt. If the market price of the stock falls below the par value, the company may be liable to shareholders for the difference. Most companies opt to set a minimum par value for their stock shares to circumvent either of these scenarios.
For example, if company XYZ issues 1,000 shares of stock with a par value of $50, then the minimum amount of equity that should be generated by the sale of those shares is $50,000. Since the market value of the stock has virtually nothing to do with par value, investors may buy the stock on the open market for considerably less than $50. If all 1,000 shares are purchased below par, say for $30, the company will generate only $30,000 in equity. If the business goes under and cannot meet its financial obligations, shareholders could be held liable for the $20-per-share difference between par and the purchase price.
Unlike a stock, a bond has a real par value. The bond is worth its par value at maturity.
No-Par Value Stock
In some states, companies are required by law to set a par value for their stocks. If not, they may choose to issue "no-par" stock shares.
This "no-par" status means that the company has not assigned a minimum value to its stock. No-par value stocks do not carry the theoretical liabilities of par value issues since there is no baseline value per share. However, since companies assign minimal par values if they must, there's little effective difference between a par stock and a no-par stock.
There are several reasons why a company would elect to issue no-par stock:
- The company has less flexibility in pricing for future public offerings should the company set the par value of its stock too high.
- The company wants to avoid potential liabilities to shareholders should the market value of its stock drops below its par value.
- The company wants to avoid potentially misquoted valuations. The stock's value or market price will often widely vary from par value.
- The company wants a less complicated accounting structure for reporting as no-par stock issuances only require use of one general ledger account.
In most cases, the par value of the stock today is little more than an accounting concern, and a relatively minor one at that.
The only financial effect of a no-par value issuance is that any equity funding generated by the sale of no-par value stock is credited to the common stock account. Conversely, funds from the sale of par value stock are divided between the common stock account and the paid-in capital account.
The par value of a stock may have become a historical oddity, but the same is not true for bonds. Bonds are fixed-income securities issued by corporations and government bodies to raise capital. A bond with a par value of $1,000 really can be redeemed for $1,000 at maturity.
Par Value Stock vs. No-Par Value Stock Example
Imagine a company issues 100,000 shares of stock at $15/share. The company has decided to issue no-par stock. As part of the sale, the company received $1.5 million (100,000 shares * $15/share). The accounting entry for the sale results in a debit to cash received. The company's equity section of their balance sheet also increases. Since no-par value stock was issued, only the common stock account is used.
- Debit: Cash, $1,500,000
- Credit: Common Stock $1,500,000
Now, let's say the company decided to instead issue the same 100,000 shares with a par value of $1/share. As par value and no-par value often have no bearing on market prices, the company still received $15/share. The accounting entry results in the same debit to cash, but the company must now record two credits: one for the par value of the stock, and one for the excess proceeds greater than par value. The account used for the proceeds greater than par value is called "Additional Paid-In-Capital".
The common stock account is credited for the amount of par value received. In this example, the company received proceeds of $100,000 (100,000 shares issued at $1/share par value). The company also credits the Additional Paid-In-Capital account for the proceeds received in excess of par value. In this example, the proceeds equal $1,400,000 (100,000 shares * ($15 market value - $1 par value).
- Debit: Cash $1,500,000
- Credit: Common Stock $100,000
- Credit: Additional Paid-In Capital $1,400,000
What Does It Mean If a Stock Has No-Par Value?
If a stock has no-par value, a company has not assigned a minimum value for its stock (often at the time of issuance). In some states, the company may not legally be required to assign this value. The company must indicate the share’s no-par value on the stock certificate or within its articles of incorporation. This value does not impact the market value of a stock.
What Are the Effects of No-Par Value?
A company may issue no-par stock to avoid the circumstance that its share price drops below par value and it is owed a liability to shareholders. Imagine a situation where a stock has a par value of $1 and a market value of $0.75. Because the market value is trading below par value, the company has a liability owed to shareholders of $0.25.
By issuing no-par stock, the company relinquishes any determination of value for the stock. Therefore, the company will not have a future obligation to shareholders should its stock price decline.
Can Shares Be Issued Below Par Value?
Shares can be issued below par value, though doing so would be unfavorable for the issuing company. The company would have a per-share liability to shareholders for the difference between the par value of the stock and the issuance price.
Why Is Par Value Important to Shareholders?
Par value often has little to no bearing to shareholders. One of the only circumstances shareholders may be impacted by par value is if the issuing company goes bankrupt and the shareholder acquired the shares of stock for below par value. In this rare circumstance, debtors can legally pursue these shareholders for the difference between what they paid for the shares and the par value.