What Is No-Par Value Stock?
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 are 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.
Understanding No-Par Value Stock
Companies may find it beneficial to issue no-par value stock because doing so gives them the flexibility to set higher prices for future public offerings and it results in less liability to shareholders if the stock should dramatically drop. Because of the known fluctuations in pricing associated with the stock market, investors typically do not consider a par, or written face value, necessary prior to purchasing a particular investment. In addition, the production of stocks with a face value may result in legal liabilities regarding the difference between the current going rate and the par value assigned to the stock making them a less attractive option for stock issuers.
When companies issue a no-par value stock, this allows the price of the stock to experience variations naturally. A no-par stock’s sale price can be determined by the basic principles of supply and demand, fluctuating as necessary to meet market conditions without being misrepresented by the face value.
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 while currently owing 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 payment of the debt.