What Is No-Par Value Stock?
Let me explain no-par value stock directly: it's stock that a company issues without specifying a par value in its articles of incorporation or on the stock certificates. You'll find that most shares today are either no-par or low-par value, with the price of low-par ones set by what investors are ready to pay on the open market.
Key Takeaways
- No-par value stock comes without a par value.
- Its value depends on what investors will pay in the market.
- Companies benefit by issuing stock at higher prices later on.
- No-par has no face value, while low-par might be as low as $0.01.
- A downside of low-par is that if the company fails, it might look undercapitalized from the start.
Understanding No-Par Value Stock
You should know that companies issue no-par value stock to gain flexibility in setting higher prices for future public offerings. This setup lowers the risk for shareholders if the stock price drops sharply. Given the stock market's ups and downs, investors often don't worry about par value before buying. Issuing stocks with a face value can create legal issues over the gap between market price and par value, which is why issuers prefer no-par.
When no-par stock is issued, its price follows supply and demand, adjusting to market conditions without the distortion of a face value.
Important Note
Be aware that some states prohibit corporations from issuing no-par stock.
Special Considerations
Consider this scenario: if a company issues stock with a low-par value of $5.00 per share and sells 1,000 shares, the book value shows as $5,000. If the business succeeds, that's fine. But if it fails and owes a creditor $3,000, that creditor might review the accounts and see the company wasn't fully capitalized. This could lead to shareholders being required to help pay the debt.
No-Par Value Stock vs. Low-Par Value Stock
No-par stocks have no face value printed on them, whereas low-par stocks might list something under $0.01 up to a few dollars. Smaller companies sometimes issue stocks with a $1.00 face value to reduce shareholder numbers, using it as an accounting entry.
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