What Is Par Value on a Stock?
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 meanings 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. Common stock issued with par value is redeemable to the company for that amount—say $1.00 per share, for instance.
It used to be that the par value of the 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.
Why Would A Stock Have No Par Value?
- Par value, which is also called par, nominal value, or face value, is the amount at which a security is issued or can be redeemed.
- No-par value stock doesn't have a redeemable price, rather prices are determined by the amount that investors are willing to pay for the stocks on the open market.
- Most shares issued today are identified as being either no-par value or low-par value stock.
No-Par Value Stock
You might be asking yourself why a company would issue shares with no par value. Corporations do this because it helps them avoid 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.
A no-par value stock is issued without the specification of a par value indicated in the company's articles of incorporation or on the stock certificate. Most shares issued today are indeed classified as no-par or low-par value stock. No-par value stock prices are determined by the amount that investors are willing to pay for the stocks on the open market.
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.
No-par vs. Low-par Value Stock
No-par value stocks are printed with no face value designation while low-par value stocks may show an amount lower than $0.01 or up to a few dollars. Often, when a smaller company is aiming to have a lower number of shareholders, it may choose to issue stocks with a face value of $1.00. This small amount can then function as a line item for accounting purposes.
Business Risks Associated With Low-Par Value Stock
If a business releases stock with a low-par value of $5.00 per share and 1,000 shares are sold, the associated book value of the business can then be listed as $5,000. If the business is generally successful, this value may be of no consequence. If the business collapses and owes a creditor $3,000, the company in which the business is indebted may call for a review of various accounting statements. As the review progresses, it might be discovered that the failed business was not fully capitalized. Subsequently, this can lead the owed business to exercise its legal right to require shareholders to contribute to the payment of the debt.