No Par Value Stock - Explained
What is No Par Value Stock?
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What is No-Par Value Capital Stock?
No Par Value stocks are issued without a par value mentioned either on the share certificate or in the issuer company's prospectus. There is no minimum baseline for determining the value of such stocks, the prices are determined by the amounts the investors are willing to pay.
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How Does No Par Value Stock Work?
Companies may prefer issuing a no-par value stock, as it allows them to sell the shares at a higher price in future offerings. It can also results in less liability for the issuing company to the shareholders in the events of dramatical price drop. The investors generally do not mind buying a no-par value share, as the market price of share fluctuates anyway. A no-par value allows to avoid confusion over the par value and the market value of a share. The stocks with par value may cause legal liabilities regarding the difference between the current market rate and the par value specified on the stock. The price of a no-par value is decided on the basis of the investors perceived value of the issuing firm. It depends on a number of factors including cash flows and competitiveness of the industry. Companies issuing no-par value stocks debits cash account and credits the common stock account or capital share account. Thus, implicit value is assigned to the issued stocks. However, no-par value stocks may be disadvantageous for the shareholders. If the issuing company accepts a lower price for the new issue, the value of already issued stocks get reduced, and the shareholders have to bear a loss. Issuing no-par value stocks is illegal in the United Kingdom and in some states of the United States. It is common in Belgium, Canada and some parts of the United States. In the states where no-par value stocks are illegal, companies issue stocks with par value set at $0.01 per share or a little more than this. These are called low-par value stock. This is done to enjoy all the benefits of the no-par value while theoretically conforming to the legal obligations.