Stocks are the lifeblood of the financial markets, providing individuals and businesses with opportunities to invest in companies and, in turn, helping those companies raise capital for their operations and growth.
It’s not unusual to find equities without a par value, even though the majority of stocks have a notional or “par” value. In this article, we’ll explore the concept of par value and look into the reasons on Why Would a Stock Have No Par Value?
What is Par Value?
Par value is the lowest price at which shares of a firm can be issued. It is sometimes referred to as the face value or nominal value. For instance, a bond with a par value of $500 can be redeemed upon maturity for $500.
This concept holds particular significance in the context of fixed-income securities like bonds or preferred shares, as interest payments are calculated as a percentage of the par value. For example, a 6% bond with a par value of $500 would yield $30 in interest annually. Similarly, common stock issued with par value is redeemable to the company at that specific amount, for example, $0.50 per share.
Historically, the par value of common stock used to be equal to the investment amount, much like it is for fixed-income securities. However, in the present financial landscape, most stocks are typically issued with either a very minimal par value, such as $0.05 per share, or without a par value altogether. Par value has a long history and was originally used to calculate a corporation’s legal capital. Companies would issue shares with a nominal par value, and shareholders would pay that amount to the company for each share.
Stocks With No Par Value
You might be curious as to why a company would choose to issue shares without a par value. Companies choose this strategy to reduce potential obligations to owners in the event that the stock price declines. For example, if a stock was selling at $15 per share and the par value was fixed at $20, the corporation would theoretically be liable for $5 per share.
In the company’s articles of incorporation or on the certificate, a par value is not mentioned when a no-par value stock is issued. The majority of shares issued in the modern financial environment are classified as either no-par or low-par value stocks. No-par value equities are valued according to what investors are ready to pay for them on exchanges.
Low-par vs. no-par Value Stock
No-par value stocks are issued without a specified face rate, whereas low-par value stocks may display an amount ranging from a fraction of a cent to a few dollars. On occasions when a smaller firm intends to limit the number of shareholders, it might opt to issue stocks with a face value of $2.00, for instance. This modest sum can serve as a distinct item for accounting purposes.
Risks Associated With Low-Par Value Stocks
Suppose a company issues stock with a modest par value of $7.00 per share, and they manage to sell 500 shares. The company’s recorded book value in this case would be $3,500. This number could not mean much when the business is doing well.
However, the creditor may carefully review different financial statements if the company is having financial issues and owes them $2,500. It might become clear from this analysis that the struggling company was undercapitalized. As a result, the creditor has the right to formally request that shareholders pay a portion of the debt.
Even though those with no par value are less prevalent than those with nominal values, they still have a number of benefits for both businesses and investors. No-par stocks are a good example of how classic ideas like it are changing to better serve the demands of contemporary firms and the investors who support them.
As with any financial decision, companies and investors should carefully consider their unique circumstances when choosing between stocks with it and those without it, understanding the implications and benefits of each choice.
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