Discount Share (Stock) - Explained
What is Discount Share?
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Table of ContentsWhat is a Discount Share (Stock)?How Does a Discount Share Work?Academic Research on Discount Share
What is a Discount Share (Stock)?
These are the stocks issued in the market to be sold for less than its nominal value or par value. It also refers to selling shares below the fair market value. The nominal value or par value of a share is the minimum price for a specific class of stock to be sold in a public or private offering. The company charter states the par value.
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How Does a Discount Share Work?
Discount shares are issued at a discount price to incentivize the investors to purchase the stocks. For this purpose, it is common to issue shares at a price below the market value. It is not common, however, to issue shares below their par value. In general, there is no connection between the market price and par value. Nowadays most of the stocks are issued without a par value. In most of the states of the U.S., it is prohibited to sell the shares at a price less than its nominal or par value. The legal restriction of selling the shares at such a discounted rate is in effect to safeguard the interest of the creditors of the company. The discounted share may result in a deficiency in company capital and shortage of assets. The assets are needed to pay the debt in case of insolvency. Also, the shareholders purchasing the discount shares may face contingency liability to the creditors for the price difference. There are certain exceptions to the rule where a share can be purchased at a discounted rate below par value. Employees with certain stock options are allowed to purchase the share at a low price. Companies may grant a discount on the stocks for their employees at an early stage. The market value may increase at the time when the employees can actually purchase the share, but they are legally permitted to purchase it at a discounted rate.