Difference Between Par Value and No Par Value Stock
In the context of stock, par value and no-par value refer to two types of stock a corporation may issue. Let’s explore both:
Par Value Stock:
The par value of a stock is the minimum price that a corporation can legally issue its shares. This is a somewhat historical concept and has little relevance in today’s financial markets, as most stocks are issued well above their par value. For example, a company might set the par value of its stock at $0.01 per share, but sell shares for $50 each.
The par value is typically set very low to avoid legal issues because if shares are sold for less than their par value, the investors could potentially hold the directors personally responsible for the difference. So, companies set the par value as low as possible to minimize this risk.
No Par Value Stock:
No par value stock, as the name implies, is stock issued without a specified par value. Many jurisdictions allow companies to issue no par value stock. This concept was created because par value often has no relation to the market price of the stock, so it can be misleading.
The absence of a par value means that the market price of the stock is whatever the market is willing to pay for it. It also eliminates the legal risk associated with selling shares below par value.
In accounting, for no par value stock, the entire proceeds from the issuance of the stock are recorded in the “common stock” account. If the company decides to assign a “stated value” to the no par shares, then this amount is treated similarly to par value, and the amount above stated value is recorded in the “additional paid-in capital” account.
Both par and no-par value shares have the same potential for profit and loss, dividend payments, and voting rights, all other things being equal. The distinction between par and no-par value is primarily an accounting and legal one.
Example of the Difference Between Par Value and No Par Value Stock
Par Value Stock Example:
Let’s say Company A decides to issue 1,000 shares of stock with a par value of $1.00 per share. This means that Company A cannot issue or sell these stocks for less than $1.00 each. If the company decides to sell the stock for $10.00 per share, the amount over the par value ($9.00) is considered additional paid-in capital in the company’s balance sheet.
In this case:
- Common stock (par value): 1,000 shares * $1/share = $1,000
- Additional paid-in capital: 1,000 shares * $9/share = $9,000
No Par Value Stock Example:
Now, let’s consider Company B that issues 1,000 shares of no-par value stock. If Company B decides to sell each share for $10.00, all of the proceeds are considered common stock. If the company decides to assign a “stated value” to the no-par shares (let’s say $1.00 per share), the accounting would be similar to par value stock.
In this case (assuming a stated value of $1.00 per share):
- Common stock (stated value): 1,000 shares * $1/share = $1,000
- Additional paid-in capital: 1,000 shares * $9/share = $9,000
Remember that these values are accounting values and may not reflect the actual market value of the shares once they start trading in the stock market.
